Relevant and even prescient commentary on news, politics and the economy.

Greenspan’s Parting Shot

In its last meeting with Alan Greenspan at the helm, the FOMC decided today to raise interest rates (i.e. the Federal Funds rate) yet again. See Mark Thoma for analysis of the accompanying statement.

Despite David Altig‘s response to my worry that the Fed might overshoot (I think David and I differ more in our assessment of inflation risk than in our analysis of what happened in 1995 – inflation probably seems to be a less pressing problem right now for me than for him) I remain concerned that monetary policy may be becoming too tight for a slowing economy with stable inflation.


UPDATE: Parenthetical remark amended upon reflection.

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Ponnuru on Earmark Reform

Keeping with my New Year’s resolution, let me say BRAVO to Ramesh Ponnuru for this:

But conservatives are almost certainly overestimating how much good “earmark reform” can do … Critics of Alaska’s “bridges to nowhere” have pointed out that it makes no sense for the Congress to fund such dubious projects at the expense of, say, fixing the levees in the Gulf coast. But merely eliminating the earmarks for those bridges didn’t solve that problem. Most federal highway funding is allotted to each state according to a complicated formula. Getting rid of the earmarks didn’t reduce federal spending, or even reduce Alaska’s allotment … Are there reforms short of outlawing earmarks that could be worthwhile? Sure. Requiring congressmen to disclose which projects they are responsible for funding is one. But don’t expect this reform to save a lot of money … Riedl thinks that an addiction to pork changes what those incumbents want. “Pork changes your entire approach to your job.” He estimates that adjusting for inflation, federal spending has gone up 29 percent since 1995 while federal spending on earmarks has gone up 164 percent. (They’re still, by his estimate, less than two percent of the budget.)

To be fair to Mr. Ponnuru, I’ve selected the portions of his op-ed that concede the cutting earmarks will have at best a very modest effect on overall spending. There is a lot more to his piece worth reading besides his recognition that reducing earmarks or even reducing pork will not solve the massive Federal budget problem by itself. I just hope the NRO Financial types pay attention to the fact that Mr. Ponnuru actually understands the simple arithmetic of the Federal budget.

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Moving to a Single-Payer System

As a follow up to my last post about administrative costs in the US health care system, let me take a moment to address the following hypothetical question: what could we really expect if the US moved from its current system to a single-payer system?

Theoretically, there’s no clear answer to this question. On the one hand, it’s possible that people in the US would consume more health care services than they already do if they didn’t have to fight private insurance companies over every payment, which could cause health care spending to rise. In addition, millions of people in the US who currently lack health insurance would be insured, possibly encouraging them to consume more health care services.

However, one could reasonably argue that some of the additional health care services consumed (particularly by those who are currently uninsured) would be more preventative in nature, thus reducing health care costs for problems that are more seriously developed. A study by the Institute of Medicine estimates that providing health insurance to the uninsured would save perhaps $130bn by replacing expensive hospital visits by the uninsured with far cheaper treatments at earlier stages of illness. (See Paul Krugman’s discussion about diabetes for another example.)

Furthermore, the administrative costs that I discussed earlier would plausibly be reduced dramatically, perhaps by hundreds of billions of dollars per year. These types of savings would have to balanced against the increased consumption of health care services.

Since there are theoretical forces that would make a single-payer health system both more expensive and less expensive, the best we can do is look at examples from other countries to try to gauge which force would be larger. Much has been written about how health care spending in countries with nationally-provided health insurance is lower than in the US, though their health outcomes are as good or better than in the US. Note as well that waiting times are not necessarily any higher in countries with single-payer health care.

As another useful data point we can examine the case of Taiwan, a country that replaced a collection of different insurance schemes with a National Health Insurance program in 1995. The percent of Taiwanese with health insurance rose from about 60% in 1994 to 96% a few years later. It turns out that in Taiwan’s case, the forces that would increase costs roughly balanced the forces that would decrease costs. A study in Health Affairs reported the following:

Our data show that Taiwan was able to adopt the NHI without using measurably more resources than what it would have spent without the program. It seems that the additional resources that had to be spent to cover the uninsured were largely offset by the savings resulting from reduced overcharges, duplication and overuse of health services and tests, transaction costs, and other costs.

These pieces of evidence suggest that a single-payer health insurance plan does not typically raise health care spending in the aggregate. If anything, the evidence suggests that single-payer systems are cheaper than the US’s system. While this is not conclusive evidence for what might happen if the US were to adopt a single-payer plan, it does seem to place the burden of proof on those who would argue that such a plan would increase medical spending in the US.

However, the reasons to adopt a single-payer system are not only, or even primarily, economic. The moral case for nationally-provided health insurance is at least as important, albeit one without data for me to measure or graph.


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The US Health Care System: Administrative Costs

Why are health care costs so high in the US? Some possible explanations include medical malpractice insurance, improving (but also more expensive) medical technology, the desire by people to simply spend more of their income on health care services as their income rises, and large and increasing administrative costs.

If he addresses the question of high medical spending at all in his State of the Union address tonight, Bush is likely to focus solely on the medical liability insurance explanation (though I’m willing to be pleasantly surprised on this). His proposed solution to this problem is tort reform. Unfortunately, as I’ve written about previously, non-partisan estimates suggest that tort reform is likely to produce only a small decline in health care costs, of perhaps $6 billion per year, out of total medical care spending of $1,878 billion in 2004. That’s not much of an impact.

So let’s consider a more substantial contributor to the US’s extraordinary health care spending: administrative costs.

How Big is the Bureaucratic Burden?

We have a couple of estimates of how high administrative costs are – i.e., expenses incurred by the health care system to do things other than to provide health care services. One prominent study that appeared in the New England Journal of Medicine in 2003 estimated that the cost of administering the US’s health care system was about $300bn in 1999. A more recent study in the International Journal of Health Services found that in 2003, administration costs in the US health care system ate up about $400bn, or about 25% of total health care spending.

By comparison, national health care systems incur administrative costs of a few percent of total health expenditures: according to the NEJM study Canada’s national health insurance system spends just 1.3% on overhead, and the US’s Medicare and Medicaid programs have administrative costs of between 2-5%.

In addition to being large in an absolute sense, administrative costs have been rising faster than other health care costs in recent years. The Medicare and Medicaid Actuary’s Office estimates that the direct administrative costs of private health insurance plans (including profits) rose from about $40bn in the late 1990s to about $95bn in 2004. The following chart shows these costs represented in dollar terms and as a percent of total private health insurance payments.

Note that these estimates only measure the direct costs paid by the insurance plans themselves, however, and exclude the bureaucratic burdens faced by doctors, hospitals, etc. to deal with insurance paperwork. The NEJM study estimated that hospitals and doctors devote roughly one-fourth of their resources to dealing with insurance paperwork (no time series of these costs exists, unfortunately). Indirect administration costs in the US health care system are roughly four times the direct administrative expenses incurred by the insurance companies themselves.

All in all, the IJHS study concluded that the US health care system could probably eliminate 75% of its administrative costs by switching to a single-payer system (see this document for one good example of what such a system might look like). The excessive bureaucratic burden (i.e. over what it could have with a single-payer system) of the US’s health care system seems to be in the neighborhood of $300bn per year. That’s some real money. And it’s growing, not shrinking.

What Explains the Excessive Expenses?

Economic theory provides several fairly clear and convincing explanations for why private health insurance plans spend so much money on administration, including economies of scale (or lack thereof), burden-shifting, and selection.

First of all, private health insurance plans are far smaller than national health insurance plans, and thus have much less ability to reap economies of scale. For the same reason, the relative administrative costs of the Medicare system have steadily been falling over time.

Secondly, private health insurance plans have a strong financial incentive to try to shift as much of the costs of each insurance claim on to individuals, providers, and other health insurance providers. It therefore makes sense for them to devote substantial resources to the task of trying to avoid paying claims that are brought to them. One example of this effect is how insurance companies go over claims with a fine-toothed comb to try to deny them whenever possible. A national government-run insurance plan would have no such incentive, since there would be no one to try to shift the burden to.

Finally, private plans also have a strong financial incentive to try to exclude high-cost individuals from their plans. It therefore makes sense for them to devote a lot of resources toward vetting potential enrollees and screening out those that they guess will have large claims. Again, a national insurance plan has no such incentive, because by definition it is set up to insure everyone.

These are just some of the ways in which the market for health care is rife with what economists call “market imperfections” and “market failures”. And as every economist learns in their first year in graduate school, when there are market failures and imperfections, the private market outcome is not likely to be the most efficient outcome, and government intervention (or even provision of the good) will probably produce far better results. Unfortunately, the evidence from the US’s health care system seems to suggest that economic theory is exactly right in this case.


UPDATE: For more about some implications of this for the US, see my next post: “Moving to a Single-Payer System“.

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US Debt Ceiling

From December 29, 2005: Snow urges Congress to raise debt limit U.S. Treasury Secretary

“The administration now projects that the statutory debt limit, currently $8.184 trillion, will be reached in mid-February 2006,” Snow said in a letter to 21 members of the U.S. House of Representatives and Senate released by Treasury after financial markets had closed.

The debt limit was last raised in November 2004 by $800 billion to its current level. The letter to Congress does not specify an amount the Treasury wants the ceiling set at this time.

US National Debt as of Jan 26, 2006: $8.191 Trillion.


EDIT / CLARIFICATION: The US is not in default. (Vorpal noted this in the comments) Not all of the National Debt counts against the Debt Ceiling and, in addition, the Treasury Secretary can play some accounting games as Treasury Secretary Robert Rubin did in ’96 … from SF Chronicle:

… in his Dec. 29 letter, Snow said that while the debt limit “will be reached in mid-February 2006,” he could delay default for a month using “available prudent and legal actions.”

These actions, MacGuineas said, would include putting IOUs instead of cash into federal retirement accounts — a tactic that Clinton administration Treasury Secretary Robert Rubin first employed in 1996, when Republican lawmakers balked at raising a debt ceiling then at $4.9 trillion.

Back then, some lawmakers in the Republican-controlled House of Representatives called for Rubin’s impeachment, saying his action usurped the powers of Congress. But in 2002, when the Bush administration was about to hit the $5.95 trillion debt limit it inherited from President Bill Clinton, then-Treasury Secretary Paul O’Neill employed Rubin’s tactic to buy time until Congress raised the debt ceiling to $6.4 trillion in June.

I found this amusing, but the US is not in default.

Best to all, CR

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President Bush, January 20, 2004:

[W]e can cut the deficit in half over the next five years.

President Bush, February 8, 2005:

[My budget] keeps us on track to cut the deficit in half by 2009.

President Bush, January 6, 2006:

[W]e are still on track to cut the federal deficit in half by 2009.

President Bush, January 26, 2006:

[W]e can cut our deficit in half by 2009 and make sure the American people still get their tax relief.

Yesterday’s forecast of the budget deficit by the CBO:


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Dramatic Slowdown in GDP Growth

The BEA has just released its first estimate of economic growth for the fourth quarter of 2005. It was dramatically lower than most people were predicting. The consensus estimate was for about 3.5% growth. Some pessimists guessed that it would be as low as 2.5%. The actual figured turned out to be just 1.1%. From today’s BEA news release:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.1 percent in the fourth quarter of 2005, according to advance estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 4.1 percent.

…The deceleration in real GDP growth in the fourth quarter primarily reflected a deceleration in [personal consumption], an acceleration in imports, a downturn in federal government spending, and decelerations in equipment and software and in residential fixed investment that were partly offset by an upturn in private inventory investment.

This is a terrible report. Consumer spending slowed dramatically, to its lowest rate of growth in recent history. Business spending slowed even more dramatically, from a growth rate in the neighborhood of 8-10% over the past 10 quarters to just 3% this quarter – the lowest rate of business spending growth since 2003:Q1.

In fact, the only thing that kept GDP growth positive at all was a massive build-up in inventories – the largest increase in inventories since early 2002. Apparently businesses were caught off guard by the slowdown in demand, and have not yet slowed their production accordingly. Presumably, they will.

All in all, this is an extremely worrying report. I’ve been bearish about economic growth in 2006 for a little while now, and this has just confirmed my worst fears.


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Kerry Calls for Alito Filibuster While Senator Clinton Blasts Violation of FISA

If one goes to, the breaking news is that Senator Kerry calls for a filibuster of the Alito nomination. Almost as excellent as the latest from Senator Clinton:

“Obviously, I support tracking down terrorists. I think that’s our obligation. But I think it can be done in a lawful way,” the New York Democrat said. Clinton, a potential 2008 presidential candidate, told reporters she did not yet know whether the administration’s eavesdropping without warrants broke any laws. But the senator, a lawyer, said she did not buy the White House’s main justification for the tactic. “Their argument that it’s rooted in the authority to go after al Qaeda is far-fetched,” she said in an apparent reference to a congressional resolution passed after the September 11, 2001, terrorist attack. The Bush administration has argued that the resolution gave the president authority to order such electronic surveillance as part of efforts to protect the nation from terrorists. “Their argument that it’s rooted in the Constitution inherently is kind of strange because we have FISA and FISA operated very effectively and it wasn’t that hard to get their permission,” she said.

But in their race to be even more pathetic than Faux News, CNN includes in the same story:

Polls suggest the public is divided on whether the administration should be able to eavesdrop on suspected terrorist communications

Good God – no! We support going after the terrorists and FISA allows for eavesdropping providing that the government gets a warrant. Of course, CNN was repeating an AP story but couldn’t the author of this copy read the earlier sentence in the story where Senator Clinton said: “Obviously, I support tracking down terrorists”?

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Robert “No Relation to Paul” Samuelson on Health Care Policy

Robert Samuelson provides a few insights worth repeating:

Almost everyone agrees that we ought to “fix the health care system” – a completely meaningless phrase despite its popularity with politicians, pundits and “experts.” Indeed, it is popular precisely because it is meaningless … Unfortunately, tinkering isn’t enough. As everyone knows, health care spending has risen steadily. In 2004, it totaled 16 percent of national income, up from 7.2 percent in 1970. Spending will continue to rise, if for no other reasons than that the population is aging and the average annual health costs for someone 65 and older ($7,910 in 2003) are – surprise – more than twice those for someone 35 to 54 ($2,966). As health insurance becomes more costly, the number of uninsured, now about 46 million, may grow. Worse, health costs may depress wage gains, raise taxes and squeeze other government programs … Americans generally want their health care system to do three things: (1) provide needed care to all people, regardless of income; (2) maintain our freedom to pick doctors and their freedom to recommend the best care for us; and (3) control costs. The trouble is that these laudable goals aren’t compatible … Disliking the inconsistencies, we hide them – to individuals. We subsidize employer-paid health insurance by excluding it from income taxes (the 2006 cost to government: an estimated $126 billion). Most workers don’t see the full costs of their health care; a reported Bush proposal to add new tax subsidies would magnify the effect.

On this subsidy aspect, I agree, but also note the wise comments from David Altig as to alternative interpretations of the rising share of national income accruing to health care. But as Max Sawicky (who I often steal clever quotes from) notes, Samuelson goes awry here:

Every attempt to do so has failed. Consider the “managed care” experiment of the 1990s. The idea was simple: Herd patients into health maintenance organizations or large physician networks; impose “best practices” on doctors and patients to encourage preventive medicine and eliminate wasteful spending; and cut costs through administrative economies. For a while, it seemed to work. From 1993 to 1997, private insurance premiums rose only 2.6 percent annually. But managed care upset doctors and patients. It restricted personal choice. Some coverage denials seemed inhumane or inept. After a political backlash, managed-care organizations relaxed cost controls. Now, some say that because the “market” has failed, greater government control is the answer. Private insurance has high overhead costs and generates too much paperwork. True. Still, there’s not much evidence that over long periods government controls health spending any better. From 1970 to 2003, Medicare spending rose an average of 9 percent annually, reports the Kaiser Family Foundation. In the same years, private insurance costs rose 10.1 percent annually.

As Max notes:

He notes that Medicare (per enrollee) spending grew “only” 1.1% slower than private insurance costs. But, this was over 33 years (1997-2003), meaning that, relative to their 1970 levels, private insurance costs are 40% higher than Medicare’s. The problem with health care inflation is not this year or the next – it’s what happens over coming decades. In this context, small changes add up.

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