ObamaCare would increase health care burden

The Office of the Actuary, part of the U.S. Department of Health and Human Services, exposes the hard truth about ObamaCare:

The nation's medical costs will keep spiraling upward even faster than they are now under Democratic legislation pending in the House, a report from government economic experts concluded Wednesday. ...

Unlike previous estimates that have focused mainly on the legislation's impact on the federal deficit, the actuaries' report looked at total costs, public and private, over the next 10 years. It found that the nation's health care tab would increase somewhat more rapidly with the legislation than if nothing is done. The main reason: Newly insured people will seek medical care. ...

Health care would account for 21.3 percent of the U.S. economy in 2019, slightly more than an estimated share of 20.8 percent of the economy if no bill passes. Economists have warned such increases are unsustainable.

"With the exception of the proposed reductions in Medicare ... (the legislation) would not have a significant impact on future health care cost growth rates," the report said. Moreover, it's "doubtful" that proposed Medicare cuts will stay in place, the analysts concluded.

If I remember correctly, the House bill includes the public option. This casts serious doubt on the Democrats' claim that the public option would reduce health care costs.

The definition of High Broderism

"Broderism," named after Washington Post columnist David Broder, is a word invented by left-wing bloggers to express contempt for bipartisanship and political centrism among elected officials. A quick Google search for "Broderism" turns up lots of left-wing blogs and websites, but no right-wing ones and few moderate ones. Basically, if someone uses the word "Broderism," you can expect that they hate Senator Joe Lieberman.

Variants: "Broderism," "High Broderism," and "Higher Broderism."

Unemployment to remain high for years

According to a survey of professional forecasters conducted by the Philadelphia Fed, the unemployment rate is expected to remain abnormally high for at least three more years.

When looking at the graph above, keep in mind that from the mid-1990s until 2007, unemployment generally ranged from 4-6%, with NAIRU (essentially the natural rate of unemployment) being about 5%. Furthermore, since 1947 there have only been three times when the unemployment rate exceeded 8%: the mid-1970s, the early 1980s, and now.

These numbers echo, but are worse than, a recovery prediction I quoted six months ago:

Even if the recession miraculously ended tomorrow, economists estimate that at least three years would pass before full employment returned and output rose enough for the economy to operate at full throttle.

How to create better financial regulation

Lots of people like to blame stuff like the current financial crisis on the opposing political party. For example, note how Republicans like to blame the housing bubble, which caused our current troubles, on the Community Reinvestment Act and Democrats like to blame it on lax Bush administration regulation.

The truth is that nobody of any political affiliation likes to step in and take away the punchbowl when everyone's partying. Just look at the failure of anyone to do anything about this decade's housing bubble under President Bush or the stock market bubble that occurred during Bill Clinton's second term.

Bubbles are caused by human nature. Since regulators are human beings, they are as susceptible as anyone else. How many home-owning regulators of any political affiliation would have wanted to reign in the rapid rise in housing prices, for example?

Instead what are needed are mathematical rules, such as requiring home buyers to make 20% down payments when buying homes. (Note that under President Obama and a Democratically-controlled Congress, the FHA is actively encouraging absurdly low 3.5% down payments.)

Larger down payments would encourage home buyers to care less about monthly payments and more about overall price. They also would give home owners a bigger buffer to protect themselves when home prices fall. They would also force home buyers to have more skin in the game, so they will be less inclined to just walk away when their home price falls.

All financial institutions should be required to maintain sufficient capital reserves, not just traditional banks. The required reserve ratio should automatically rise during booms and fall during busts. Countercyclical reserve policy like this would help stabilize both the financial system and the money supply.

Finally, teaser rates should be outlawed. Teaser rates are intended to take advantage of people's innate susceptibility to hyperbolic discounting. If someone isn't willing to buy a home based on the regular interest rate and the regular monthly payments, then they shouldn't be buying the home.

George W. Bush wins third Nobel Peace Prize for Americans!

Anti-Bush sentiment has won America its third Nobel Peace Prize in a single decade. President Obama follows previous winners Al Gore and Jimmy Carter. We've never had a hot streak like this!

My thoughts on a second economic stimulus package

Some economists and politicians are advocating a second economic stimulus package. Here are my thoughts on a second stimulus.

State governments likely have better ideas than Congress regarding what are high value spending projects within each state. On the whole, pre-existing state spending was likely already going to the highest-value projects available. Since state governments are now being forced by circumstances to drastically cut back at a time when Congress's stimulus package is in effect, this suggests that Congress massively misallocated capital with the first stimulus.

If Congress creates a second economic stimulus package, it should only consist of more aid to the states and extended unemployment benefits. Congress should avoid a bunch of bells, whistles, and pet projects. Stuff like cash for clunkers and subsidies to transfer existing homes from one person to another are just real-life examples of the broken window fallacy.

Wasteful spending harms long-term economic growth just to avoid short-term pain. On the other hand, when states are forced to cut useful investment spending (e.g. education and infrastructure), then it harms the economy in both the short-term and the long-term.

Warren Buffett described the first stimulus package as a mix of Viagra and candy. Aid to the states and extended unemployment benefits would be pure Viagra. Most other spending options would be candy.

Economists should stop ignoring bubbles

Yale economist Robert Shiller has constructive criticism for his own profession:

The widespread failure of economists to forecast the financial crisis that erupted last year has much to do with faulty models. This lack of sound models meant that economic policymakers and central bankers received no warning of what was to come.

As George Akerlof and I argue in our recent book Animal Spirits, the current financial crisis was driven by speculative bubbles in the housing market, the stock market, energy and other commodities markets. Bubbles are caused by feedback loops: rising speculative prices encourage optimism, which encourages more buying and hence further speculative price increases — until the crash comes.

You won’t find the word “bubble,” however, in most economics treatises or textbooks. Likewise, a search of working papers produced by central banks and economics departments in recent years yields few instances of “bubbles” even being mentioned. Indeed, the idea that bubbles exist has become so disreputable in much of the economics and finance profession that bringing them up in an economics seminar is like bringing up astrology to a group of astronomers.

The fundamental problem is that a generation of mainstream macroeconomic theorists has come to accept a theory that has an error at its very core — the axiom that people are fully rational.

The problem with health care costs is the insurance

The Democrats' health insurance reform proposals will magnify the problems that make health care so expensive:

The administration's plan will impose mandates that employers provide coverage, mandates that individuals obtain coverage, and mandates about the form this coverage will have to take. These will remove the freedom to choose one's health-insurance plan, because government, in its effort to correct perceived inequities, will dictate which health-care services must be covered and which health-care providers must be used. ...

The mandates will lead to large increases in the cost of health insurance for everyone. Research studies have shown that as people become insured, especially under a health plan that offers broad coverage and low copayments, they consume more health-care services. The best estimates indicate that each newly insured person will approximately double his or her health spending.

With 30 million to 40 million newly insured persons under the administration's plan, aggregate health-care demand will increase significantly. But when demand expands prices increase. ...

The mandates will also have adverse additional longer-run consequences. According to provisions in both House and Senate bills, mandated plans must have low copayments and provide coverage of health-care services that is at least equal in scope to a typical, current employer-sponsored plan. But these are the very flaws that are responsible for high and rising health-care costs...

Comprehensive, low-deductible, low-copayment insurance has brought us to where we are today. The administration's plan to expand and lock-in this flawed paradigm will ultimately defeat the goal of making health services more affordable for everyone.

Again, insurance is what causes health care to be so expensive, because it encourages the population as a whole to purchase more health care services than it otherwise would. Increased demand then pushes up prices. As I quoted economist Martin Feldstein in an earlier blog post:

Since a typical 20% copayment rate means that an extra dollar of health services costs the patient only 20 cents at the time of care, patients and their doctors opt for excessive tests and other inappropriately expensive forms of care.

By the way, here's a list of reform ideas that the Democrats are ignoring. Here's a functioning national health care system that results in far lower costs than the European-style health care systems that the Democrats want to emulate.

Real health care reform: break down the state barriers

The Democrats don't want real health insurance competition. They just want a government takeover of the health insurance industry (i.e. a single payer system). If they did want real competition, they wouldn't need a "public option". All they'd have to do is break down the state insurance barriers that prevent health insurance from being sold across state lines.

Notice the question that the White House repeatedly ducks in this interview:



For more of my blog posts on the subject of health care, click here.

Recession may not be over

Last month, as the unemployment rate took a reprieve from its upward spike, I speculated that the recession might be over. Friday's release of the August unemployment rate showed a resumption of the upward spike, suggesting that the end of the recession may be yet to come.

Here's a graph of the official unemployment rate over the past ten years. Gray bars indicate recessions:


Here's a graph of the official monthly job loss numbers during this recession:


For conspiracy theorists who don't trust the government, here are the job loss numbers from the private ADP Employment Report. Notice that ADP measures job losses in August as being roughly 50% higher than the BLS numbers: