The Medicare Debate, Part I

Turn on your TV and I bet you'll hear one of the Presidential candidates claim that if we elect the other guy, Medicare patients are bound to suffer. You'll hear Romney allege that Obama took $700 billion out of Medicare to pay for Obamacare.

It's true: Obamacare comes with a $716 billion reduction in government's Medicare expenditures over the next 10 years. The majority of these cuts will reduce how much doctors and insurance companies will be reimbursed for the care that they provide/fund.

But there's a perception out there that since these cuts are made to providers, they won't affect patients. A recent Reuters article "Top Six Myths about Medicare" says that the cuts to providers are "mostly meaningless to patients." In National Journal's "10 Things You Need To Know About The Medicare Debate", Thing #1 reads: "President Obama's cuts to Medicare do not affect any benefits." And a Washington Post analysis says "there's one area these cuts don't touch: Medicare benefits."

One of the most important medical benefits people have is the ability to be seen by a doctor when in need. Arbitrarily cutting pay for doctors could certainly impact this benefit.

If a doctor's pay per patient is reduced, he'd need to cram in more patients per day in order to earn as much as before. This trend would leave fewer available doctors for people with urgent medical needs. Some doctors would look to avoid Medicare patients altogether. A 2010 American Medical Association survey of doctors attests to this.

The broader issue here is the unwillingness of some to consider or even acknowledge the existence of unintended consequences of government intervention. And if we can disagree about the effects of this one small aspect of Obamacare, imagine what other unforeseen consequences lie within its 2,700 pages.

In my next post I'll analyze Paul Ryan's proposal for Medicare. I skimmed it the other day and it's more complicated than either side would have you believe.

Making Money

The piercing tone from his clock radio is his signal to stumble out of bed, collect himself, and get ready to face another day at work. Shower, breakfast, coffee, commute. He plans the day ahead, then spends it working hard — making tradeoffs, meeting deadlines, and trying to find some value in those unavoidable meetings. He closes up shop and drives home, eager to finally spend some time with the people who mean the most to him. And at the end of it all he lands in bed, ready or not to hit repeat.

The more money he makes during his days — and the more he’s made throughout his life — the more likely he is to hear politicians clamor for him to pay his fair share back to society. Senate hopeful Elizabeth Warren recently sounded off about the need for the most successful businessmen to pay their fair share in taxes, declaring, “You built a factory and turned it into something terrific, or a great idea? God bless, keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.”

Putting aside the fact that high earners already do pay a large share of their earnings in taxes, Warren’s point and those like it overlook the reality that a person making money is in itself a benefit to society.

The vast majority of people who make money do so only because they’ve delivered goods or services of comparable value. Both parties — employer and employee — benefit from the exchange, and each side’s gain ultimately extends to society at large. An employee’s ability to meet his employer’s needs leaves the employer free to focus on growing the business in order to tackle the needs of potential new customers. This dynamic helps those folks whose needs will now be met as well as those who will be hired to fill new positions in the growing business. In addition, the wealth amassed over the course of a person’s career won’t just be spent on yachts and palaces but also invested back into the economy, spurring the growth of existing businesses and the creation of new ones. As John F. Kennedy famously put it, “a rising tide lifts all boats.”

The wealthiest among us are in this way already contributing the most to society, and those contributions have little to do with taxes.

During a 2010 financial reform event in Illinois, President Obama said, “I do think at a certain point you’ve made enough money.”

I say you can’t get enough of a good thing.

Boehner's Flaw

In discussing his latest debt ceiling plans, House Speaker John Boehner said yesterday, "Remember one of the principles here: we are not going to increase the debt limit by anything more than what we're willing to cut spending." Specifically he's proposing to raise the debt ceiling by $1 trillion ($1T) and to reduce future spending by around $1T. The concept sounds reassuring at first, but in practice it wouldn't come close to solving the problem we face.

The debt ceiling exists to limit the amount of debt we can carry. Our debt grows when our federal government spends more than it receives in taxes and has to borrow money to cover the difference. For each of the past 3 years the government has spent about $1.5T that it didn't have, and our debt grew by that much each year.

Boehner's proposal is to raise the debt ceiling by $1T and to cut spending by $1T over the next 10 years. That would mean cutting spending by only $0.1T each year, which would reduce next year's deficit from $1.5T to $1.4T. Well if we only raised the ceiling by $1T, those cuts wouldn't even get us through 1 year without us hitting the ceiling again, at which point Congress could just apply Boehner's principle again...and then again, and again, essentially just paving the way for more astronomical deficits.

The real flaw here is in comparing the amount of spending cuts to the amount we raise the debt ceiling. The right thing to do is to compare the amount of spending cuts to our projected deficits. If we're about to annually spend $1.5T we don't have, we need to cut $1.5T in spending per year! Accomplish that, and there would be no need to raise the debt ceiling.

Creating Wealth

There is a widespread notion that there’s only a fixed amount of wealth in the world — that one can only gain wealth at the expense of others. This belief goes hand in hand with a variety of common viewpoints: the conviction that one man’s fortune is unfair to the rest of us; the guilt many Americans feel on account of our relative wealth in the world; and the fear that immigrants who send money back home have reduced our overall wealth. But what exactly is wealth? And if the fixed-wealth view is wrong, how is wealth created?

Wealth is anything that helps a person or group meet their needs and desires. People use wealth to meet needs on their own (e.g., a house is a form of wealth that provides shelter) and by interacting with others who are in a position to help (e.g., money is wealth that can be used to buy food from a vendor). To better understand the nature of wealth, let’s consider whether a simple transaction between two people adds wealth to their community, and whether wealth has been taken from others in the process.

Let’s say that Grace needs a jacket and pays James $50 to make one for her. For simplicity we’ll assume that James already has the materials and machinery necessary for the job.

After the exchange, the community has gained one jacket at the expense of the materials required to make it. Since the jacket is able to meet needs such as warmth and comfort that the raw materials alone could not, wealth has been added to the community.

In addition, James has likely learned something by making the jacket. Perhaps he’s discovered a way to speed up the process or to improve the quality of his product. James is now better able to meet the needs of others; his newfound knowledge is a form of wealth added to the community.

The 50 dollars themselves still exist, but are they worth as much as they were before? Do transactions like this reduce the value of currency or raise it? Well an increase in the supply of a product tends to reduce its price because the additional competition among suppliers forces them to slash prices to compete for customers. And lower prices mean more bang for the buck. So this transaction is representative of the type of production that increases the value of currency, which adds wealth to communities throughout the world.

On the other hand, the machinery used to make the jacket has undergone wear and tear that will eventually take it out of service, leaving it unable to meet needs any longer. Over time, different forms of wealth are inevitably lost: products age and lose their value, and people leave the work force taking their expertise with them. But if beneficial transactions happen efficiently and often enough, overall wealth creation will outpace these natural losses.

In the end, Grace and James have added wealth to their community without taking it from anyone! Wealth has been created.

Sadly, the fixed-wealth misconception is self-fulfilling: antipathy toward achievers leads to tax-raising schemes that stifle people’s ability and incentive to create wealth. In this time of need, we should allow and encourage talented and motivated people to do what they do best.

Economics vs. Politics

In Applied Economics: Thinking Beyond Stage One, Thomas Sowell illustrates the major difference between economic and political mindsets:

"Politics offers attractive solutions, but economics can offer only tradeoffs. For example, when laws are proposed to restrict the height of apartment buildings in a community, politics presents the issue in terms of whether we prefer tall buildings or buildings of more modest height in our town; economics asks what you are prepared to trade off in order to keep the height of buildings below some specified level. In places where land costs can equal or exceed the cost of the apartment buildings themselves, the difference between allowing ten-story buildings to be built and allowing a maximum of five stories may be that rents will be much higher in the shorter buildings, because land costs are now twice as high per apartment.

"Nor are money costs the only costs. With twice as many shorter buildings now required to house the same number of people, the community must spread outward since it cannot spread upward, and that means more commuting and more highway fatalities. The question then is not simply whether you prefer shorter buildings, but how much do you prefer shorter buildings, and what price are you prepared to pay to mandate height restrictions in your community. A doubling of rents and three additional highway fatalities per year? A tripling of rents and ten additional highway fatalities per year? Economics cannot answer such questions — it can only make you aware of a need to ask them.

"Economics was christened 'the dismal science' because it dealt with inescapable constraints and painful tradeoffs instead of more pleasant, unbounded visions and their accompanying inspiring rhetoric, which many find so attractive in politics and in the media. Moreover, economics follows the unfolding consequences of decisions over time, not just what happens in stage one, which may indeed seem to fulfill the hopes that inspired these decisions. Nowhere are the consequences more long-lasting than in housing, where a community can have an aging and shrinking supply of apartment buildings with accompanying housing shortages for decades, or even generations, after passing rent control laws which have a track record of leading to such consequences in countries around the world.

"The passage of time insulates many political decisions from public awareness of their real consequences. Only a small fraction of New Yorkers today are old enough to remember what the housing situation was there before rent control laws were introduced during World War II. Only a dwindling number of Californians are old enough to remember when that state's housing prices were very much like housing prices in the rest of the country, instead of being some multiple of what people pay elsewhere for a home or an apartment. These and other consequences of particular political decisions in the past are today just facts of life that new generations have grown up with as something as natural as the weather or other circumstances of their existence which are beyond their control.

"The vast numbers of frustrated California motorists who endure long commutes to and from work on congested highways are unlikely to see any connection between their daily frustrations and attractive-sounding policies about 'open space' or 'farmland preservation.' Nor are economists who point out that connection likely to be as popular with them as politicians, who are ready to offer solutions to rescue these motorists from their current problems using the same kind of one-stage thinking that created those problems in the first place."¹

1. Thomas Sowell. Applied Economics: Thinking Beyond Stage One.

Heeding Hazlitt

David Axelrod, Senior Advisor to President Obama, recently advocated the Stimulus Bill (the American Recovery and Reinvestment Act of 2009):

"This summer will be the most active Recovery Act season yet, with thousands of highly-visible road, bridge, water and other infrastructure projects breaking ground across the country, giving the American people a first-hand look at the Recovery Act in their own backyards and making it crystal clear what the cost would have been of doing nothing...The Recovery Act is putting millions of Americans to work and helping the economy grow again."

Axelrod is correct in saying that the bill's spending provides employment and improves infrastructure. However, further analysis calls into question whether such spending actually helps the economy grow.

Distinguished economist Henry Hazlitt provides such analysis in his compelling book, Economics in One Lesson:¹

"A certain amount of public spending is necessary to perform essential government functions. A certain amount of public works—of streets and roads and bridges and tunnels, of armories and navy yards, of buildings to house legislatures, police and fire departments—is necessary to supply essential public services. With such public works, necessary for their own sake, and defended on that ground alone, I am not here concerned. I am here concerned with public works considered as a means of 'providing employment' or of adding wealth to the community that it would not otherwise have had.

"A bridge is built. If it is built to meet an insistent public demand, if it solves a traffic problem or a transportation problem otherwise insoluble, if, in short, it is even more necessary than the things for which the taxpayers would have spent their money if it had not been taxed away from them, there can be no objection. But a bridge built primarily 'to provide employment' is a different kind of bridge. When providing employment becomes the end, need becomes a subordinate consideration. 'Projects' have to be invented. Instead of thinking only where bridges must be built, the government spenders begin to ask themselves where bridges can be built. Can they think of plausible reasons why an additional bridge should connect Easton and Weston? It soon becomes absolutely essential. Those who doubt the necessity are dismissed as obstructionists and reactionaries.

"Two arguments are put forward for the bridge, one of which is mainly heard before it is built, the other of which is mainly heard after it has been completed. The first argument is that it will provide employment. It will provide, say, 500 jobs for a year. The implication is that these are jobs that would not otherwise have come into existence.

"This is what is immediately seen. But if we have trained ourselves to look beyond immediate to secondary consequences, and beyond those who are directly benefited by a government project to others who are indirectly affected, a different picture presents itself. It is true that a particular group of bridgeworkers may receive more employment than otherwise. But the bridge has to be paid for out of taxes. For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. If the bridge costs $1,000,000 the taxpayers will lose $1,000,000. They will have that much taken away from them which they would otherwise have spent on the things they needed most.

"Therefore for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $1,000,000 taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, radio technicians, clothing workers, farmers.

"But then we come to the second argument. The bridge exists. It is, let us suppose, a beautiful and not an ugly bridge. It has come into being through the magic of government spending. Where would it have been if the obstructionists and the reactionaries had had their way? There would have been no bridge. The country would have been just that much poorer.

"Here again the government spenders have the better of the argument with all those who cannot see beyond the immediate range of their physical eyes. They can see the bridge. But if they have taught themselves to look for indirect as well as direct consequences they can once more see in the eye of imagination the possibilities that have never been allowed to come into existence. They can see the unbuilt homes, the unmade cars and radios, the unmade dresses and coats, perhaps the unsold and ungrown foodstuffs. To see these uncreated things requires a kind of imagination that not many people have. We can think of these non-existent objects once, perhaps, but we cannot keep them before our minds as we can the bridge that we pass every working day. What has happened is merely that one thing has been created instead of others."²

1. It's amazing that a book written 60 years ago directly addresses what Axelrod said just last week.
2. Henry Hazlitt. Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics, pg. 19-21.

Freedom and Happiness

I had a great day at work the other day. After hours of trying to figure out why the software I'd written wasn't working, I finally found the error in my code that was causing the problem. As a software engineer, one of the most rewarding parts of my job is successfully debugging code — finding and fixing my own mistakes. It's strange that part of my happiness requires that I make mistakes, because those same mistakes can cause frustration and delay! It's sometimes hard to understand what makes us happy.

This got me thinking about a friend of mine who moved from beautiful Palo Alto, California to blustery Chicago. I remember asking him why he'd want to leave such a great climate for cold and windy weather, and he told me that he'd become bored of the perfect weather and that he missed the rain and the cold. It struck me as odd that even though my friend would probably prefer nice weather on any given day, he was happiest when he experienced subpar weather some of the time.

The recipe for happiness can be puzzling, and it changes from person to person and from time to time. The inconsistent and unpredictable nature of happiness underscores the importance of giving individuals the freedom to find and bring about their own happiness, and makes me wary of any mandatory government program that is claimed to make life better for all people.

Take Social Security, the social insurance program that is funded by mandatory payroll taxes. Before Social Security was signed into law, President Franklin D. Roosevelt said, "There is no reason why everyone in the United States should not be covered. I see no reason why every child, from the day he is born, shouldn't be a member of the social security system." So FDR couldn't see any reason why people shouldn't have Social Security? Well what about if they don't want to? What if they want to spend their hard-earned money on something else? And who is anyone to say what should or shouldn't be a part of everyone else's life?

I think it's arrogant for anyone, even the President, to presume that any one thing will make life better for everybody. And while financial security can greatly improve a person's quality of life, government-imposed financial security undermines our freedom. As Benjamin Franklin put it, "They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety."