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Kimball Corson
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I am both an economist (three year M.A., Univ. of Chicago, 1968, in economics PhD program) and a lawyer (J.D., Univ. of Chicago, 1971). I had a Woodrow Wilson National Fellowship in economics and the good fortune to study at Chicago under seven Nobel Laureates in economics (received before or... More
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Wandering the Oceans
  • How Now the DOW?
    So how is it that from about 1950 up to about 1985, the DOW Jones Industrial Average stayed mostly in  the range from about 250 to 1200, when America was growing and doing pretty well on average, and then, from about 1985 to the year 2000 -- a  mere fifteen years -- the DOW shot up to over 10,000, when middle class America realized almost no gains in real terms and the economy basically cycled from one boom and bust to the next?  This is a serious question.

    Do we face one of the biggest bubbles of all time?

    Is there an accounting explanation?

    What has happened here?

    We all need to know the answer which is not to be, I would add, meaningfully found in fighting with the question.,

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Dec 24 2:39 AM | Link | 1 Comment
  • The Health Care Reform Agenda (Revised Version)
    While many have strong feelings for or against the initial health care reform legislation, few Americans understand the economic issues involved. Popularization of the economics of health care has been neglected. This is one reason reform has been so difficult.
    1.  Why health care reform is necessary.
    Before passage of the New Health Care bill, we were the only developed nation without a national health care program. Yet, we spend 16% of GDP on health care. That is almost 1/6 of our entire economy, as measured by GDP. It is as large as our housing sector. Yet little is written here or elsewhere for the public to understand the issues and economics involved with the sector. Housing, on the other hand, gets lots of ink.
    However, according to recent polls, only 5% of Americans believe that the health care system we had was workable or working. This can in part be seen from the Congressional Budget Office's (CBO) projections for the old health care system. In the absence of the changes in federal law, that is, the heath care reform just passed:  
    1.  Total spending on health care would rise from 16 percent of gross domestic product (GDP) in 2007 to 25 percent in 2025, 37 percent in 2050, and 49 percent in 2082.
     2.  Federal spending on Medicare (net of beneficiaries’ premiums) and Medicaid would rise from 4 percent of GDP in 2007 to 7 percent in 2025, 12 percent in 2050, and 19 percent in 2082.
    Between 2000 and 2005, insurance industry administrative overhead – including both administrative expenses and industry profits – increased 12% per year. Premiums have skyrocketed, increasing over 87% over the past six years. What is going on in health care is America's dirty little secret. Those raking in the money and their friends don't want the word to get out or any reform to pass -- just say "no" has been their position. The problem is they have over reached and the present situation is obviously not a viable prospect and most seem to understand that intuitively, except those wanting to maintain the status quo and the profits it affords.
    2. The health care problems we face.
    The problem is optimal effective reform is not possible until people understand specifically how the markets in this area are in fact distorting resource allocations, at the most basic level, theory aside as I have learned. Consequently, most people’s proposals for reform or change are (1) non-existent or (2) incoherently all over the place. There is little understanding or agreement. Some even urge the old system that 95% of Americans correctly recognize is malfunctioning!
    Among the public and politicians there has been too little practical understanding of the problems in the markets involved and even less useful thinking about how to fix them by what has to be government intervention to produce the kinds of results obtained in other areas of the economy by free markets that work, i.e., good resource allocations and cost effective pricing.
    The reason the Republicans lost here is (1) they are apologists for and sometimes enablers of excessively high prices in the relevant markets; (2) many don’t understand the problems of markets in this area. (3) they made no systematic and sensible alternative proposal for reform, especially reform that included protecting those not receiving adequate medical care, and (4) by just saying “no,” to any reform proposal they cast their lot with the old health care system that 95% of Americans recognize was not working. This was not the best way to go.
    The problems the old health care system faces are clear, although few wanted to admit them and even fewer understand them as an interactive package. They are:
         1.     Excessive oligopolistic pricing of health care and malpractice insurance by insurance companies ineffectively regulated by the states, but which are exempt from the antitrust laws and which are relative few in number because they have eliminated their competitors (There have been over 400 health care mergers in the last 10 years and just two companies dominate a full third of the national market.);
         2.     Some patients being treated for free creating a cross subsidization in their favor on hospital charges and doctors fees and against those who are insured or pay for their own treatment;
        3.     Excessive prices for doctors’ services (a) due to AMA restricting number of doctors by restricting number and size of medical schools*, and (b) due to excessive charges for malpractice insurance for reasons cited in (1) above, causing (c) too much expensive, defensive medicine being practiced by doctors which is not cost effective, and (d) due also to an excessive paperwork load on doctors that cuts into to their treatment time and compensation.
        4.     Lack of systemic incentives to practice preventive medicine;
        5.     Drug companies engaged in fraud (e.g., Pfizer, repeatedly), oligopolistic over-pricing and other misdeeds and abuses; and
         6.     Inadequate economies of scale in the treatment of patients, including underutilized facilities, due to so many being excluded from the medical care treatment system because of (1) and (3) above.
    3. The health care reforms at hand.
    The question has been how and where to have the government intervene, but it is now with a new wrinkle: as a matter of public social policy, it has been determined that “everyone” is to be covered by health insurance for medical care.  No one is to be left uncared for. This is a quantum leap because, under the old system, over 45 million Americans—including over 8 million children—lack health insurance and 80% of the uninsured are in working families. A good part of that omission however was due to the failings of the markets involved.
    In other words, we have two proposals at hand, (1) intervene to correct the markets’ misallocations in the area, and (2) try to expand and extend medical care to everyone by extending insurance coverage for all. The two goals are very much related and interactive, given the problems in the relevant markets.
    The needs of the system to emulate free markets are simple but not that easy to implement because of seriously entrenched economic interests that profit from the status quo. That is part of the reason issues have been confused and opposition has been so strong to the changes coming.
    In a nutshell, the reforms needed are:
        1.      Insurance premiums for both health care and malpractice have to drop to more competitive levels, which will be easier if more people are insured, malpractice claims are reduced, doctors cut back on practicing defensive medicine and the government aggressively applies the antitrust laws and laws of unfair competition and establishes an insurance exchange to force competition and make it easier to shop for insurance based on rates and coverage;
        2.      Doctors salaries need to drop, medical schools be expanded, more tuition help needs to be available in exchange for service time, and doctors need to stop practicing so much defensive medicine and be more cost effective; Medicare compensations are already starting to be dropped by 20% to force the issue because it will take time for the number of doctors to change;
         3.     Malpractice suits need to be screened when they are filed to eliminate “strike suits” and frivolous or bogus claims so they are not an expensive and silly burden on the system;
         4.     People need to be able to buy their drugs worldwide at the cheapest prices; the antitrust laws and laws of unfair competition need to be more aggressively enforce against the pharmaceutical companies, with the term of patent protection individually tailored to actual R&D cost amortization and a reasonable profit for each drug and the drug companies need to get their oligopolistic prices down;
         5.     Outlaw drug companies from fraud, unfair competitive practices such as blocking or buying off generic drugs that would otherwise be available to consumers at much reduced cost and finally also allow cooperative drug purchases by groups at lower negotiated prices;
         6.     Have health care policies encourage wellness check-ups and promote preventive medicine similar to Kaiser Permanente because it is cheaper in the long run; and
         7.     Everyone needs to be insured and pay as much of their own way as they can, with taxes levied to make up the difference for those less fortunate financially, which taxes will be less than they otherwise would be because (a) premiums will be lower because (b) doctors will charge less, (c) hospital charges will be lower (no more cross subsidization), (d) the cost of medicines will be less, and (d) much greater economies of scale will be possible with more people insured.
    This is a tall order, given where we are, but where we are is not a position in which we can remain. The system is interactive and if properly handled can be made to work, but expect continued fighting from those getting unfair oligopolistic profits from the status quo. They very much want to hang on to their ill gotten gains. Too, for the apologists out there who want us to stay put, it is important for them to know what is wrong with the system for they are apologizing. This is the basic, not so hidden agenda for health care reform at this point.
    footnote *

    (Doctors per 1000 population
    3.40 per 1000 people Germany
    3.40 per 1000 people Austria
    3.37 per 1000 people France
    3.90 per 1000 people Belgium
    3.82 per 1000 people Israel
    3.60 per 1000 people Switzerland
    3.20 per 1000 people Spain
    4.20 per 1000 people Italy
    4.50 per 1000 people Russia
    4.40 per 1000 people Greece
    2.30 per 1,000 people USA, on par here with
    2.25 per 1000 people Slovenia
    In “free” markets, it is simply supply and demand: fewer doctors => higher doctors' salaries that in turn means higher medical bills => higher insurance premiums => fewer people can then afford health insurance => fewer people insured => more people uninsured and without medical care.
    Canada and the United Kingdom have 2.1 and 2.2 per 1000 respectively, for similar reasons, but both have national health care systems that cover everything for everybody (instead of the seriously malfunctioning “free” markets we have in the U.S.A.) and that are much, much more efficient at delivering medical treatment than ours because of massively less bureaucracy, overhead, red tape, hassle and paperwork.
    If we wanted similar results to what they have, we could adopt either of their systems or some hybrid of the two. The core problem is entrenched financial interests have been making a ton of money off our “system” as it is and they don’t want any change. That is much more the problem than what changes should we seek. Because of the opposition to change, Obama has chosen the path of least resistance, politically, which is probably not optimal and will be much more time consuming to fully implement. America has a mean-spirited greed problem and it is not just limited to the medical area either. We are awash in too many "no's," lies, misinformation and the blocking of accurate information.) 

    Disclosure: No positions.
    Mar 26 3:00 AM | Link | 241 Comments
  • The Economics of Health Care in America
    While many have strong feelings for or against the proposed Health Care bill, few understand the economic issues involved or even what the bill contains. As of now, we are the only developed nation without a national health care program. Yet, we spend almost 19% of GDP on health care. Even so, according to recent polls, only 5% of Americans believe that the health care system we have is workable or working. The situation is a colossal mess and it reflects badly on us and our understanding in the eyes of the civilized world.
    To start with, free markets do not work in the health care area. Nobel Laureate Kenneth Arrow showed us that and how, many years ago. Absent free markets that function properly, it is clear that government has to be involved to assist in achieving results similar to what we might get from free markets if they could work in this area, that is, cost effective and efficiently provided medical care.
    The reason markets do not work properly is two-fold (1) the varieties of uncertainty involved are too great for free markets to handle, and (2) doctors feel morally obligated to treat whoever comes to them, regardless of whether they can pay. Consider first, the varieties of uncertainty involved in purchasing medical care. One, you don’t know when you are going to need it. Two, you don’t know what type of medical care you will need. Three, you don’t know who (what specialist) will provide it. Four, you don’t know whether the proposed treatment will be effective or whether further treatment will be required. Five, you don’t know what the medical care will cost. Six, you do not know where you will be when you need it.
    Such price and product uncertainty are enough to cause any market to malfunction, but add in the remaining elements of uncertainty and  free markets have little chance, especially given the possible magnitude of the expenditure by a person, which can rival buying a house. Then, in addition, we have doctors who refuse not to treat those within their purview who need care. Just making it to an emergency room usually assures treatment regardless of capacity to pay. All of these factors together destroy the free market mechanism for efficiently allocating resources in this area at minimal cost. That doctors practice or try to practice medicine to a uniform, single standard of care further compounds this problem.
    As a result of doctors’ refusal to not treat, we have the ensuing situation of paying patients being subsidized by those who can pay or are insured. This cross subsidization in large measure accounts for hospital bills to patients and insurers being so high. Call it socialism of a sort, if you will. Excessive compensation to doctors, who run many hospitals economically as though they were doctors’ cooperatives, accounts in further part for high treatment costs. The AMA has worked dutifully for years to restrict the number and expansion of medical schools and the supply of doctors. State licensing requirements have additionally involved the same ends.
    Then, into this mix, we throw health insurance companies seeking to make a good profit and the problems become compounded. Insurers would like to insure only the young and healthy, screening aggressively for pre-existing illnesses and denying coverage to the elderly, even if they are healthy. Now, the recession has added a new twist. Many of the young and healthy cannot now afford health insurance and so they are dropping it, leaving a higher percentage of those sick or ill among the insured. Insurance companies now feel compelled to raise their rates and are doing so by as much in some instances as 35% to 50%, but then even more young and healthy drop their coverage and the situation is spiraling out of control. Some insurers now think national health insurance is necessary. Nearly everyone seems to agree that the present system is not workable and cannot survive.
    While people face excessive uncertainty as individuals, and so do free markets, in trying to address health care needs under the free enterprise model, the situation is different at a macro level. If everyone is included in coverage, then the law of large numbers kicks in very aggressively and, with some time and experience, we can develop very good estimates of the number of different treatment types and profiles the public will require. We can also estimate aggregate costs and by experience and regulation based on that experience, come to control medical costs quite well. Doctors themselves control quality or the standard of care, for the most part.
    To some extent, of course, large insurance companies have the advantage of the law of large numbers as well, at least when the market for health insurance is stable, which it has not been for a while now, for reasons I have explained and for other reasons as well. Insurers’ profits are under fire. So are doctors’ salaries. But adjustments in both these compensations are in substantial measure required if we are going to provide cost effective and efficient health care. Medicare payments are in the process of being reduced by 20% and there is the expectation that insurance companies might well follow suit, as a means of controlling their cost.
    Expect much shouting from doctors, however. But they have taken advantage of their oligopolistic pricing, afforded by the AMA, for too long and it is time to get serious. If the problem is medical school costs are too high, more such schools, a bit of competition between them and substantial tuition aid with a service requirement taken back, is a good means of handing the adjustment required in doctors’ salaries. While most don’t, many doctors do earn between $500,000 and $3 million a year and think of their practices as businesses to earn a profit. This viewpoint and these compensation levels are inconsistent with cost effective treatment provided in an efficient manner.
    How to proceed now with national health care is the question. Watching law being made, as the old saw has it, is too much like watching sausage being manufactured  -- not a pleasant sight, nor  a principled one. What the proposed health care bill attempts to do, in every way possible, is to get everyone under the tent of health care coverage initially or as quickly as possible, and then sort out many of the smaller details based on present knowledge and future experience as we go. Getting everyone covered is no small feat, but that prospect now appears at hand, as we are about to have a national health care system for the first time, befitting our position as a developed nation and world leader.
    Republicans are uniformly opposed to the health care bill and predict that with its adoption, the end of the world will be on us quickly. Most Democrats are already on board. A few of the more conservative ones had to be rounded up, like runaway calves.  Points to keep in mind here are that (1) virtually no one thinks that the health care system we have is working or workable, (2) 83% of Americans believe, based on a recent poll, that lawmakers in Congress have not been doing their job, and (3) we need to do better than spend 19% of our GDP on a system that is broken and does not work and does not help everyone.
    The Congressional Budget Office (CBO) -- about the most neutral and accurate group of estimators around -- has just released its report saying that the $940 billion, ten year health care bill – that is, $94 billion a year, compared to our $663 annual defense budget, not counting almost an additional 100 billion of discretionary war spending -- would actually cut the federal deficit by $138 billion over that ten year period. That is based on a 3.8% Medicare tax on unearned income and a drop in Medicare compensation levels by almost 20% which is already being implemented.  Some 32 million Americans, now without health care coverage, will be covered. The legislation assures that 95 percent of all Americans have health insurance coverage. The bill will also assure the solvency of the Medicare program for the elderly for about the same length of time and assist Medicare patients to obtain the medicines they need.
    The 3.8% Medicare tax on unearned income would only apply to people with incomes greater than $200,000 for individuals or $250,000 for couples and the pending bill scales back an excise tax on high-end insurance plans in the Senate version. That tax on what are called Cadillac insurance plans would raise $32 billion over 10 years, much less than the $149 billion earlier planned.
    Needless to say, Texas Republicans, like most Republicans in Congress, are having a snit fit. Imagine, someone not wealthy receiving help! Heaven to be, we cannot touch the purse of the well-to-do to make sure kids get needed medical attention. As Paul Krugman explains, these people are simply from a different planet than the rest of us.
    Of course, abortion was a major issue under the proposed bill – isn’t it always? In any event, abortions are not covered under the proposed health care plan.  Even so, not one single Republican is expected to vote for the bill, whereas almost all Democrats are.
    America is about to arrive on the shores of the 20th century here.

    Disclosure: no positions
    Mar 20 4:32 AM | Link | 20 Comments
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