When Discussing Heath Care, Paul Krugman Should See A Doctor

On July 25, Nobel Prize-winning economist Paul Krugman wrote a column entitled "Why markets can't cure healthcare" in which he listed reasons for which the free market was unsuited for health care.

The tone of the column is condescending (or smug, perhaps? the difference escapes me), as he repeatedly knocks over the straw men he uses as "weaknesses" of the market in healthcare. However, I feel he mostly repeats the talking points uttered by those who favor of government-run healthcare, but -- as is typical -- without any data or sound analysis to justify his position. (Presumably, Krugman's Nobel Prize grants him immunity from having to provide supporting evidence for any of his claims.)

Sadly, the New York Times closed the comment period for this column, so I'll just share my thoughts here.

His first whopper is that the "big bucks are in triple coronary bypass surgery, not routine visits to the doctor’s office."

Wrong, and not only a "little" wrong, but "a lot" wrong. As in "billions of dollars" wrong. In 2006 (the most recent year for which data is available), Medicare payments for all bypass surgery (not just triple-bypass surgery) totaled $2.9 billion.

By contrast, in the same year Medicare paid $13.5 billion for office visits of mild to complex decision-making. These office visits represent an enormous 12.2 percent of total Medicare payments to doctors for all services and procedures. In other words, one out of every eight dollars that Medicare paid physicians in 2006 went to Krugman's piddling office visits.

So, Krugman's unsubstantiated claim notwithstanding, the "big bucks" in healthcare are with office visits, which represent a dollar expense 450 percent greater than bypass surgery. (All data are from the CMS Data Compendium.)

Krugman later states that health care "must largely paid for by some kind of insurance," and that "[c]onsumer choice is nonsense when it comes to health care. And you can’t just trust insurance companies either — they’re not in business for their health, or yours."

Insurance is necessary for SOME -- but by no means all -- healthcare costs. And anyone who mentions "consumer choice" in the same sentence as "health care" is only displaying to the world how ignorant he is. Since the 1940s/1950s, employers have been given preferential tax treatment over individuals for purchasing health insurance, with the obvious result that virtually all Americans under age 65 obtain their health insurance from their employer. Most employers offer employees a limited number of insurance "choices" (in most cases, either an HMO or a PPO, and that is it), which do not even include some of the newer packages that are more appropriate for younger workers, such as health-savings accounts or high-deductible plans). So, the vast majority of "consumers" already have very little "choice" about which insurance policy they purchase.

Krugman's comment about not being able to "trust" health insurance companies is specious and meaningless. Does that mean that people cannot "trust" their auto insurance companies, their life insurance companies, their homeowners' insurance companies, etc.?

Insurance companies need to be regulated, to be sure. But, can you trust the government, either? And, if not, who is going to regulate the government? The answer: no one. Not when the government is making the rules that will govern oversight. I would rather take my chances with a greedy insurance company that has oversight -- rather than the government, which will have no oversight, is subject to political pressure, and can always justify denying treatment for the greater good (i.e., taxpayers).

People who conduct business transactions based on "trust" -- rather than on contracts -- are destined to get fleeced, whether they are purchasing insurance or are purchasing a car. No one relies simply on "trust" when transacting with an insurance company, so Krugman's claim is just utter, misleading nonsense that ignores every aspect of contract law, business, and economics -- which is ironic, since the statement is coming from a Nobel Prize-winning economist.

Krugman states that "private insurance has much higher administrative costs than single-payer systems."

The fact that private insurance companies cost more, administratively, than public-sector insurance is a convenient falsehood for those in favor of government-financed or -controlled healthcare.

In actuality, the so-called financial "advantages" that the government demonstrates over private insurers largely derive from outsourcing to private enterprises. As a result of the outsourcing, Medicare does not have to pay union wages, infrastructure costs, or leasing/rental fees. Additionally, Medicare spends very little on reviewing insurance claims, with the result that administrative costs are kept low, but fraud is rife in Medicare.

Lastly, Krugman states that "in health care, the free market just doesn’t work."

If Krugman wants an example of how free-market principles work -- and work well -- in health care, he need look no further than a medical treatment in which government regulations are minimal, and insurance coverage is almost non-existent: laser eye surgery.

When laser-eye surgery first hit the market, costs exceeded $2,500 per eye. Approximately ten years later, per-eye costs had dropped to $1,000 per eye, with greatly improved quality.

That is how the free market works when not strictured by excess regulation: lower costs, improved quality, continuing innovation.

Robert McNamara: Maybe The Brightest, But Certainly Not The Best

Robert McNamara died last week (July 6th) at the age of 93. For anyone under the age of 50, he is probably just another historical figure, jumbled together with all of the other "government types" that populated the bureaucracy in the 1960s. He is most well known, of course, for being Secretary of Defense under Presidents Kennedy and Johnson, and for being the architect of the U.S. involvement in the Vietnam War.

And, even more specifically, he is most well known for his admission, published in his memoirs in 1995, that he felt -- essentially from the beginning of our country's involvement in Vietnam -- that the United States would be unable to win the war.

Yes, that's right.

The architect of the war, one of Kennedy's "best and brightest," the brilliant CEO of Ford Motor Company, felt from the beginning that the edifice he constructed was not durable like the cars his previous employer built. Rather, it better resembled a house of cards. (More like a cemetery of cards, actually.)

Why didn't he broach his concerns to President Johnson? Because he felt that he was simply a vehicle for LBJ's intentions and desires, and that he owed his loyalty to the president.

This is a pathetic, tired refrain that continues to this day. A recent example includes Colin Powell being a bagman for the Bush Administration, convincing the United Nations (and, by extension, the rest of the world) that Iraq was, indeed, developing and stockpiling weapons of mass destruction. Meanwhile, he was informed beforehand that George Tenet's "slam dunk" was a total fabrication. (Not, of course, that Colin Powell was a novice at being a tool of the Republican Party. He did his best to portray the My Lai massacre as a picnic.)

Alan Greenspan, also, waited until he was out of the government -- and, consequently, much less empowered to effect any change -- to inform everyone that one of the Bush Administration's major errors was abandoning fiscal restraint. (Meanwhile, Greenspan bears absolute responsibility for the Internet and real-estate bubbles, though he'd never admit it.)

Okay, I realize I'm getting sidetracked. Enough of Powell and Greenspan -- back to the ultimate government shill, Mr. McNamara.

I recognize that the pressures of politics are immense, and that standing up to the president would be an intimidating task. However, McNamara was strong enough to lead Ford, and I would think his forbidding intelligence could have crafted a way to communicate his doubts to LBJ. Guess not.

Apparently, he took his failure to make a stand quite hard, and "[o]n many occasions when confessing his errors regarding Vietnam, his voice shook or cracked and tears came to his eyes."

I find myself having a vanishingly small amount of sympathy -- or empathy -- for him. My father was drafted to Vietnam while his wife -- my mom -- was pregnant with me. Fortunately, my father returned safely, but over 58,000 sons, brothers, and fathers never did -- and McNamara bears a great deal of responsibility for THAT body count.

So McNamara felt himself a little weepy on occasion because of his inaction? He did live to be 93, so he might have had quite a few tears spill down his face. I doubt, however, that they outnumbered the tears shed by the mothers, wives, and children of those dead 58,000 soldiers. I hope the image of a different soldier visited him every day, and continues to do so. Wherever he is.

The GM Deal Stunk, But This Chrysler Deal Reeks

"It is an old fallacy that it is a legitimate task of civil government to protect the less efficient producer against the competition of the more efficient....Such a privilege conveys to the privileged the benefits which the unhampered market provides only to those who succeed in best filling the wants of the consumers."

- Ludwig von Mises, Human Action

Let no one now doubt it -- the last few weeks have laid bare Barack Obama's intent and willingness to strong-arm American industry to conform to his wishes. I speak of the convoluted arc of the Chrysler Corporation, as its lenders and the State played chicken, with the State prevailing.

To recap, during Chrysler's painfully slow slide toward bankruptcy, it borrowed money from lenders, who were granted "senior-debt" status. (In bankruptcy, there is a hierarchy of payback as follows: bank debt, senior debt, junior debt, accounts payable, preferred stock and then common stock.  This hierarchy is solidified in federal law.)

This translates during bankruptcy roughly as follows:  repayment (usually via sale of assets) at 100 cents on the dollar starts with the most senior creditors, and continues down the rungs to subsequent debt-holders until all assets are liquidated.  Usually, common stockholders receive, at most, pennies on the dollar -- this risk is also why common stockholders have the greatest upside with concomitant company success.

In Chrysler's case, lenders with senior-debt status included major banks, hedge funds, and asset managers.  The United Auto Workers (UAW) had a financial stake in Chrysler via a trust fund for retiree health insurance.  (Similar to the arrangement the union had with GM, discussed previously.)  This trust fund had junior-debt status, meaning it stood in line behind other lenders to be repaid in the event of bankruptcy.

Now, Obama and the Democrats ABSOLUTELY do not want any auto manufacturer to go bankrupt, because that would be the death knell for the still-lush salaries and benefits of its union workers.

And, much more importantly, it would probably cripple the political donations made by the UAW to Democrats.  And we are not talking about meager amounts, either:  since 1990, the Center for Responsive Politics reported that the UAW has donated over $25 million to political campaigns -- of which 99 percent has gone to Democrats.  There is a better chance Obama will be honored at the National Rifle Association than Democratic politicians will not pull out all stops to protect the UAW.

So, when it became clear that Chrysler was perilously close to bankruptcy, panic mode set in at the White House.  (After all, the UAW spent nearly $5 million to help get Obama elected.)  The Administration crafted a deal whereby the UAW would own 55 percent of Chrysler, the Italian auto maker Fiat would own 35 percent, and the government 10 percent.

Obama offered the senior creditors 32 cents on the dollar for their stakes, and managed to "convince" many of the lenders to accept the offer.  Four banks holding 70 percent of the debt agreed to a deal, while other lenders held out, believing they could get 65 cents on the dollar in a bankruptcy hearing.  Since all of the lenders could not agree to terms, Chrysler declared bankruptcy this past week.

Now, about those four banks who agreed to the deal?  It just so happens that they -- J.P Morgan, Citi, Morgan Stanley and Goldman Sachs -- received billions and billions of dollars from the Troubled Asset Relief Program (TARP) and other subsequent bailouts.  As a result, they were in no position to resist Obama's offer -- he owns them.  (Live by the sword, die by the sword.)

Obama then went on the offensive with a briefing to shame the remaining lenders that did not accept his absurd offer.  His remarks are worth noting as exemplars of the audacity of doubletalk.  Portions follow:

"But as I've said from the start, we simply cannot keep this company, or any company, afloat on an endless supply of tax dollars. My job, as President, is to ensure that if tax dollars are being put on the line, they are being invested in a real fix that will make Chrysler more competitive."

Actually, I don't think he's ever said "that" from the start.  However, simply by stating that he has, he's granted himself legitimacy as a good steward of American taxpayer dollars.  Which, given his sickeningly bloated $3.4 trillion budget for FY 2010, is such a baldfaced lie that I am baffled how anyone but a narcissistic politician (pardon the redundancy) can deliver those words with a straight face.

Additionally, he only refers to our money he's spending as "taxpayer dollars" when it suits his purposes to be seen as respecting this great responsibility he's been given.  Most of the time, when he is discussing one pet spending plan after another, our hard-earned money is referred to as "investment funds," or other such nonsense.

To continue:

"But over the past month, seemingly insurmountable obstacles have been overcome, and Chrysler's most important stakeholders -- from the United Auto Workers to Chrysler's largest lenders ... -- have agreed to make major sacrifices."

Priceless.  The "important stakeholders" he references who have made "major sacrifices"?  The UAW has been granted a potentially sweeter deal than it received under the GM reorganization.  The UAW will own a majority stake in Chrysler -- just let that percolate for a while -- even though it was far down the pecking order in terms of being repaid.  

This issue is the linchpin of why so many people are outraged over the Chrysler deal.  Let me be clear -- Obama flouted long-standing bankruptcy jurisprudence by moving the union up the repayment hierarchy, ahead of senior creditors.  These actions are probably illegal, but who in their right mind is going to cross paths with a president?  It would take years for a case to work its way through the courts; in the meantime, the bully pulpit you have doesn't even begin to compare to the bully pulpit the president has.  Not even close. 

But the interpersonal, Administration-versus-company controversies are but a sideshow to the real problem.  What do you think might happen to investment capital now?  Companies lend funds at lower rates, as long as they are granted senior-creditor status.  (In other words, lenders are willing to accept lower interest rates in exchange for a greater likelihood that they will receive a greater proportion of their principal back if bankruptcy occurs.)  

What lender, in his right mind, would offer to lend money at a low rate if they cannot even trust their place in line for repayment during bankruptcy?  Therein lies a major reason why the State, with its disproportionate influence above and beyond its expertise, should not become directly involved in private-sector financial transactions.

And, given that our president has so little business education that he does not understand that profits and earnings are the same, businesses are going to be loathe to tiptoe out on a limb the least bit.  This Administration might saw off that branch, either to help another party or out of sheer ignorance.

This scenario, single-handedly created by the Administration, has the potential to stifle lending as much as, if not more so, than the subprime lending mess.  Amity Shlaes, who wroteThe Forgotten Man: A New History of the Great Depression, has a thesis that the Hoover and Roosevelt Administrations prolonged, and deepened, the Great Depression with their inconsistent and unpredictable business interactions and decisions.  Companies that must deal with an uncertain capital, investment, or regulatory environment are much more likely simply to hoard their cash, and ride out the storm.

More from Obama's briefing:

"Fiat has demonstrated that it can build the clean, fuel-efficient cars that are the future of the industry, and as part of this agreement, Fiat has already agreed to transfer billions of dollars in cutting-edge technology to Chrysler to help them do the same. Fiat is also committed to working with Chrysler to build new fuel-efficient cars and engines right here in America."

This paragraph says the following:

1. Arrogance.  No one person -- not even Obama -- knows what the future of the automotive industry holds.  The "future" of the industry is going to be reliant upon millions of people investing and spending billions of dollars.  The assumption that fuel-efficient cars are the future is preposterous, given that SUVs, pickups, and other large cars are the best-selling vehicles, are the only profitable auto models, and the price of gas is fluctuating wildly.  It is possible -- perhaps even likely -- but not written in stone.
2. Public-sector strong-arming.  "As part of this agreement, Fiat has agreed to transfer billions of dollars in cutting-edge technology...."  In other words, Fiat would not have been able to take a large ownership stake in Chrysler unless it "transferred" billions of dollars of technology.  It also implies that, if it had a choice, Fiat would not have transferred billions of dollars of technology to the U.S.  People who run Fiat are not stupid -- they understand where, and how, the best use of their capital should be deployed.

"The United Auto Workers, who had already made painful concessions, agreed to further cuts in wages and benefits; cuts that will help Chrysler survive, making it possible for so many workers to keep their jobs and about 170,000 retirees and their families to keep their health care."

We should all be so penalized.  Only in a world where profits and earnings are different is being given 55 percent of a company considered a "concession."  The UAW, with its demands for above-market wages and benefits, played a key role in the demise of the U.S. auto industry.  It is not a coincidence that Ford, having been able to secure major concessions from union auto workers, is the only major U.S. auto manufacturer not to have to go begging and pleading to the government for an allowance like a teenager.

Additionally, if it was the "cuts" that "will help Chrysler survive," does that not imply that wages and benefits were already too high?  Seems to me that, if a salary cut is necessary to keep the business open, the business model has incorrect assumptions about wage levels.  That company better react to those market signals ... or else lights are getting turned off.

"Several major financial institutions, led by J.P. Morgan, agreed to reduce their debt to less than one-third of its face value to help free Chrysler from its crushing obligations."

No, no, no.  "Several major financial institutions ... agreed to reduce their debt" because the government had already extended them billions of dollars in grants and loans, thus creating an implicit dependence on the federal government that vaporized any negotiating power.

"While many stakeholders made sacrifices and worked constructively, I have to tell you some did not. In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. They were hoping that everybody else would make sacrifices, and they would have to make none. Some demanded twice the return that other lenders were getting. I don't stand with them."

This "group of investment firms and hedge funds" was honoring their fiduciary obligations to their customers and clients.  (As was Obama to the UAW, one could say.)  An investment or hedge fund (or major bank, for that matter) is obligated to secure the greatest return on investment capital.  It is absolutely not obligated to accede to a government's wish to decimate the value of its holdings so that other parties may be rewarded with a majority stake in the new company.  That is not the free market, nor is it capitalism, nor is it even "light regulation."  It isn't even fascism, as some are implying.  Once the government controls the factors of production, you have the "S" word ... socialism.  (Don't say it loudly, else you'll simply be blasted by someone who does not even understand the economic underpinnings of the philosophy.)

An argument can even be made -- should be made -- that the four TARP-suckling banks (J.P Morgan, Citi, Morgan Stanley and Goldman Sachs) dishonored their fiduciary obligation toward their clients and customers.  Those banks did their customers a huge disservice by accepting the government's proposal without even putting up a fight.  The same cannot be said for the holdouts.

So, we are now looking at ChryslerUAW, or maybe UAWChrysler.  Those who appreciate the business world can take some small solace in envisioning the next union negotiations between UAW-as-Owner versus UAW-as-Workers-Champion.  I'm already anticipating the first $400K annual salary for an entry-level die-cutter.

A New Big, Bad SEC Sheriff In Town

Today, Zachary Goldfarb in the Washington Post profiled the new Securities and Exchange Commission (SEC) enforcement director, Robert S. Khuzami. Completely unsurprisingly, the pro-establishment slant could have been submitted directly by the SEC's press office, an annoying a teeth-gritting pattern I have discussed before.

In addition to the Washington Post siphoning work from John Nester, Khuzami's comments are troubling for anyone who values liberty and a fair, nonintrusive government. Let's deconstruct the fawning bio article.

Khuzami discusses how the SEC has been tarnished by the Bernard L. Madoff fraud, leading to plans to "shake up" his team of 700 lawyers and -- you can see this coming a mile away -- "put more arrows in the SEC quiver." (Has any government bureaucrat ever expressly stated a need to tone down its authority?)

As if having whistleblower Harry Markopolos tell the SEC for NINE YEARS about Madoff's alleged fraud wasn't sufficient "firepower"? Markopolos did all the work for the SEC -- the agency merely had to open its mail. But, of course, the oldest admonition in the book -- more authority is not needed; simply enforcing existing rules would suffice -- would fall on deaf ears.

So, to be clear, the governmental agency falls on its face humiliatingly, and yet it will be rewarded with increased power. This is the same bureaucracy to whom people are willing to hand over their healthcare.

...Khuzami continues: "We'll distinguish ourselves in the future by being fast and furious."

Wonderful. Given that white-collar financial crimes are incredibly complex and arcane, what is not needed is painstaking, analytical investigation. Not sexy enough. What IS needed, instead, is the Wall Street equivalent of jackbooted clowns SWAT teams launching illegal no-knock raids. Yup, "fast and furious" lawyers will certainly (not) dot i's and cross t's to ensure effective prosecutions. Perhaps Khuzami is using that language to appeal to the anti-finance sentiment in the country.

In case the reader is not concerned about this soon-to-occur grab for power, consider the words of Alfred Jay Nock in Our Enemy, The State:

"[E]very assumption of State power, whether by gift or seizure, leaves society with so much less power; there is never, nor can be, any strengthening of State power without a corresponding and roughly equivalent depletion of social power."

One can already sense that Khuzami is yearning to hear the strains of Il Buono, il Brutto, il Cattivo play as he swaggers through the doors of the NYSE's trading floor.