POLICY: Taking Out The Trash-Talk

I’m up at Spot-on talking about a particularly crappy study that snuck into a WSJ editorial. I made some snarky remarks about the math skills of economists at the Manhattan Institute in the process. Of course after the editing process a Spot-on it all got a little smoother, shall we say

I’m not too worried that a Republican will actually win the White House in 2008. But I am worried that efforts by what I confidently believe will be a Democratically controlled White House to reform the U.S. health care system will founder on the free-marketeers devotion to faulty statistics, unsound analysis and, well, lying.It’s not a new problem. But it’s one that’s increasingly difficult to combat.

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  1. “Focus your efforts on making sure the rules reflect true costs”
    Surely Eastern Europe has no capacity to make a success of any economic system as my view is most of that populace still live with a mindset based in the middle ages. But the rules you agree (I think) need to be in place are not set by capitalists but by government forced by its citizens to act against the entrenched political/corporate alliance. Capitalism doesn’t need to be reformed – government and its instituions need the reforming. In the case of healthcare that means universal single-pay with a just way of paying for it because the free marketeers act with self interest blinders that push us ever closer to crisis. If you think a solution now is difficult wait until crisis forces knee jerk solutions by congressman who spend more time dialing for dollars than studying issues.

  2. Peter,
    Your beef seems to be with the externalities that are sometimes not realized until long after they’ve been incurred. I don’t know how that’s a failure of capitalism. It would be a failure in any economic system, we don’t worry about something until it becomes clear we should worry about it, then we change the rules to account for the newly recognized externalities.
    It was felt that pollution could be “handled” by the enviornment, so there wasn’t much concern intitially. Over time we realized it wasn’t being handled and it was a real cost of doing business that needed to be accounted for. So we started accounting for it and changing the rules of capitalism accordingly. That’s how it should work. (And Eastern Europe’s centrally planned economies were probably worse, by the way)
    Slavery was a part of doing business. The rules allowed for it. Government (society, us, whatever) realized the rules weren’t just. So we changed the rules.
    The market distributes resources more efficiently than any other planning mechanism. I don’t think you can argue against that. Focus your efforts on making sure the rules reflect true costs, (understanding those costs are always recalculated with new information) and we’ll get the best outcomes possible.
    Now apply that thinking to health care….if possible.

  3. pcb, I’m no economist but a full evaluation of market efficiency must include offset costs. A mine that produces the most amount of product for the least amount of input is not really efficient unless the pollution it creates or the worker injury/deaths it causes are also accounted for. This has been the problem with capitalism, its supporters fail to account for all costs which must be paid eventually. But those costs usually come from someone elses books while the profits are accumulated by owners and shareholders. If the total historical costs of slavery were accounted for then the true cost of tobacco and cotton should have been reflected in the price OR the added on taxes. But conveniently the growers/plantation owners pocketed profits then passed the true costs on to future generations. You can’t separate justice and wise use of resources from market efficiency unless they present no added costs – but that’s not the case. Show me where the present free market American health system has achieved “efficiency”, it HAS achieved profits for some but I don’t confuse efficiency with profits.

  4. “Taxes can be a drag if they are spent on support of inefficient programs but they can be good for growth when they are spent on pushing the economy in a direction that creates efficiency”
    This is, imo, one of the fundamental forks in the road regarding conservative vs. liberal economic thought. Conservatives see the majority of modern government programs as economically inefficient and better handled by the marketplace. They then downplay inequalities that inevitably arise from more market solutions. Liberals, on the other hand, downplay the inefficiencies of govt programs, and any inefficiencies that are acknowledged are a small price to pay for more equality overall.
    The idea of the government “pushing the economy in a more efficient direction” must mean we have different definitions of what “efficient” means. I submit that your definition includes notions of justice and “using resources wisely”, while classic definitions of economic efficiency focus mainly on distributing goods and services through the voluntary transactions of those participating in the market.
    If there is a more efficient (classic economic definition) direction for the economy to go, the market will find it if the rules are set up right and the market is allowed to operate.
    At least that’s what I recall the graphs in the textbook saying. 🙂
    But ultimately Barry is right, in a mixed economy like ours, even the Nobel scholars can’t agree on many of the important policy details and how they will ultimately affect the economy. There are simply too many variables.
    That makes blogs all the more fun.

  5. “Our challenge is to do that in a way that distributes the tax burden fairly across the income spectrum and does as little economic harm as possible.”
    Take note:
    Barry, Warren Buffet also said, “If this is class warfare, my class is winning”.
    pcb, my understanding of WWII was that 1. it broke the depression from huge amounts of government spending (war) and 2. the U.S. economy after WWII was fueled by a destroyed Europe (markets) and the GI bill (tax stimulus). Taxes aren’t buried in the ground, they’re spent on goods and services which stimulate the economy. If the economy is growing then citizens have both the income to pay taxes and spend on their personal needs. I never seen a tax cut not followed by huge government spending (Reagan Years), so what matters more, the cut or the spending. Taxes can be a drag if they are spent on support of inefficient programs but they can be good for growth when they are spent on pushing the economy in a direction that creates efficiency. For instance a $2 per gallon tax on gasoline would provide immediate forced conservation as well as the funds necessary to spend on conservation technology and alternate energy. Taxes should also relect hidden or postponed costs in the economy that the inevitable pay back will be born by future generations.
    You might want to read this take:

  6. taxes are usually, almost by definition, a drain on economic growth that pervert the marketplace in some way or another and almost always lead to inefficiencies.
    I think the Laffer Curve applies here. For an economy to function reasonably well, we need both the rule of law and an educated workforce. Our government could not function with a zero tax rate and would not function with a 100% tax rate.
    Over the years, I’ve had the opportunity to directly ask members of the Council of Economic Advisors, CBO and OMB directors and even Secretaries of the Treasury from both political parties at what point would an increase in our federal tax burden impede the economy’s ability to grow? None could give an answer. There is widespread consensus within the economics profession that at some point higher taxes (as a percentage of GDP) will slow economic growth but nobody has a good handle on just where that point is. Since World War II, federal taxes in the U.S. averaged about 18% of GDP. Would it hurt if we went to 18.5%? How about 20%? 25%? Nobody knows for sure. If we hold the state and local tax burden constant at its current combined rate of 10%-12% (depending on the state), I suspect (but certainly could not prove) that U.S. economic performance would probably be about the same with a tax burden ranging 15%-25%. If we replaced employer and individual financing of health insurance with taxpayer financing, for example, it would increase the tax burden by as much as 7 percentage points of GDP, but the actual fiscal burden on employers and individuals at the population level probably would not change much and could even benefit somewhat. Having said all that, I think the tax burden necessary to pay for most of the European and Canadian social safety nets is so high that it probably does reduce those economies’ ability to grow on a sustainable basis as well as their citizens’ incentives to invest, save and take risks.
    Bottom line: it’s a complicated subject, the answers are far from clear, and there is significant disagreement even among the experts, some of whom have Nobel prizes among their credentials.

  7. Matthew’s comment that the growth of the US economy after WWII shows that taxes and their collection are not a drag (but actually a stimulus) on the economy is an interesting claim. My recollection of old econ classes (not a great recollection these days, I admit) was that taxes are usually, almost by definition, a drain on economic growth that pervert the marketplace in some way or another and almost always lead to inefficiencies. We can argue about the obvious need for taxes based on other concerns , (moral arguments for redistribution, the public good, etc.) , but we really don’t argue much about the fact that taxes and “government investment” usually limit growth, not encourage it.
    Are they teaching something else in econ 101 these days?

  8. ” .. health care system will founder on the free-marketeers devotion to faulty statistics, unsound analysis and, well, lying ..”
    Why, of course. Only Republicans lie. And I.T. company owners who advertise never do.
    Those who call others “liars” without legal proof are vile, disgusting, and absurd. Your advertisers ought to wash your brain out with lye-soap.

  9. Matthew,
    I attended the Manhattan Institute event in late September at which Ben Zycher discussed his paper about Medicare’s administrative costs and distributed copies of it.
    One valid point that he made is that the Medicare program has administrative costs that are not reflected in the CMS data. For example, when people first enroll in Medicare when they reach age 65, it is the Social Security Administration (SSA) personnel that handle the enrollment paperwork. The IRS collects Medicare taxes and audits tax returns. The Treasury raises capital when taxes are not sufficient to pay for government programs, which is most of the time. Bob Lasewski and others estimate that these “indirect” government costs that should be allocated to the Medicare program probably about double the reported administrative cost ratio from 3% to 6%. Moreover, since average medical spending per senior is 2-3 times higher than the average for the under 65 population, Medicare’s administrative costs as a percentage of spending will look much lower in comparison to private spending than it would if administrative costs were calculated per member. Finally, Medicare (and Medicaid) probably both underspend on fraud mitigation. If one compares Medicare’s “fully allocated” administrative costs as a percentage of total program spending to the administrative costs of the largest private and government employer plans (largely self-insured), they are pretty close to each other. The private plans also include disease management as an administrative cost which creates an added bias in CMS’ favor on this metric.
    That all said, I most certainly do not agree with Zycher’s point about the deadweight loss to the economy from taxes and the infrastructure required to raise them and enforce compliance. Warren Buffett estimates that the federal government overall needs to raise revenue equivalent to about 20% of GDP to pay for the programs that the American people seem to want. Our challenge is to do that in a way that distributes the tax burden fairly across the income spectrum and does as little economic harm as possible.

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