A Free-market Solution to Universal Health Care (I)

Raymond L. Richman

There are no incentives in the Democratic proposals for a universal national health care system bill for the insured or the medical providers to economize on health care. Any economizing will come from the government bureaucracies. From a free market point of view, it places about a sixth of the economy in the hands of the government and will cost taxpayers trillions of dollar, exacerbating the government budget deficit. There is a free market alternative that provides real incentives to keep costs low.

The current Senate and House proposals cover everything from head to toe, from lobotomies to removing bunions. They make health insurance compulsory with penalties for failure of businesses and the uninsured to enroll. They are faulty in conception as is Medicare and Medicaid. Households need insurance against the costs of catastrophic illnesses; they do not need insurance against cuts and bruises, treatments of fractures of hands or feet, etc. The reason for health insurance is the fact that catastrophic illnesses cannot be predicted except by actuarial methods and they bankrupt households when they occur.

Most health problems are not serious enough to require any insurance at all. The cost of a visit to a nurse or a general practitioner is well within the financial capacity of all households with a member who is working. People need to eat and need clothing and shelter but do not need to buy insurance to finance these needs. The same is true of most illnesses that are diagnosed and treated on an out-patient basis.

It is alleged that the uninsured go to the hospital emergency rooms for illnesses that could be attended to by a qualified nurse, paramedic, or intern. It is asserted that this imposes huge costs on the hospitals. If the alleged illness can be diagnosed and treated without hospitalization and expensive tests, it imposes no greater costs on the hospitals than an ordinary clinic does. The costs of maintaining and staffing emergency facilities -- having specialists, and testing and operating facilities on call to diagnose and treat really serious illnesses and injuries -- is expensive. But such costs are not applicable to patients who are diagnosed and treated in a fifteen-minute visit and sent home. The allocation of such expensive overhead to such patients is not justified. The marginal cost of treating minor illnesses in emergency facilities is often zero. The personnel are there on a stand-by basis and often have little or nothing to do. Those who use emergency rooms as a clinic create a costly problem only when the staff and facilities are operating at capacity. In that case, the cost of treating patients with minor health problems in the emergency room is not zero but it is not infinity either. Having a general practitioner on call – MD or nurse or paramedic – is not expensive.

As long as medical services are provided free of charge or require a small co-payment as it is currently under Medicaid, Medicare, and private insurance plans, the system will be abused. Those covered have no incentive to economize and neither do the medical practitioners providing the medical service.

A free market health system envisions that all the costs of health care up to a certain level, say, $9,600 for a family of four, be borne by the household. Insurance policies would cover only medical costs above $9,600 per year. Households would be obliged to pay into health savings accounts $800 per month out of which they would pay for family medical expenses. The working poor would be expected to pay 10 percent of their income into a health savings account. Government would pay into the account enough to make up the difference. To provide an incentive to economize, the household would be permitted to keep, say, half of the savings between their health expenditures and $9,600.

The role of government would be to subsidize health savings accounts for the poor and the cost of their “catastrophic” insurance above $9,600. All participants would have the incentive to economize on costly professional visits.

The opening of clinics in pharmacies to attend to common complaints is a step in the right direction. It makes it easier to economize on health care. But there needs to be a monetary incentive to economize. The rebate of half of the savings does that. There may be other ways. Let the competitive market decide.

A bill authorizing a market-oriented health care system should require as little as 20 pages instead of the 2,000 plus pages in the Senate bill.

"Unexpected" declines in house construction and GDP

Howard Richman

Housing starts declined an "unexpected" 10.8% from September to October according to statistics released by the Commerce Department yesterday. This decline will likely cause an "unexpected" decline in GDP during the fourth quarter.

The Main Stream Media conclusion is that the decline in housing starts is due to builder uncertainty of whether Congress would continue subsidies to the housing market. For example, the Washington Post reports:

The decline probably reflects that nervous builders scaled back amid uncertainty about whether the first-time home-buyer tax credit that had buoyed sales most of the year would expire as scheduled this month, analysts said. Earlier this month, Congress extended the $8,000 tax credit and expanded it to some repeat buyers.

However, there is a much simpler explanation. Both "Cash for Clunkers" and the stimulus to home buyers were only temporary boosts to the economy. They pushed forward purchases that would have been made during the fourth quarter. With fewer new cars and new homes purchased during the fourth quarter, GDP will decline.

The fact is that the American consumer got borrowed-out by the trade deficits of the last decade. They had to pull back, and that pull-back caused this recession. Any attempt to pull the United States out of the recession through increased borrowing by American consumers is bound to fail. The economists who came up with these ideas were incompetent.

Why 4th Quarter GDP will Fall

The following graph shows the rising residential investment during the third quarter. This statistic will go back down during the fourth quarter:


Unlike residential investment, non-residential investment just continued its decline during the third quarter. The steady decline gives no reason to expect a rise during the fourth quarter, as shown in the graph below:


President Obama is now starting to talk about a possible double-dip recession, but this is already a double-dip recession. The first dip occurred during the first quarter of 2008. Then during the 2nd Quarter of 2008 President Bush's stimulus plan caused a temporary rise. The second dip ended in the third quarter of 2009 when President Obama's recovery plan caused the temporary rise shown in the graph below:


How to End the Recession

This recession would end were President Obama to require balanced trade with China. He does not need to continue to tolerate Chinese government policy of only letting its people buy 25¢ from us for every $1 we buy from them.

WTO rules give a trade deficit country the right to restrict imports in order to balance trade. If Obama threatened to invoke this provision, the Chinese would quickly end their export subsidies and take down their tariff, non-tariff, and currency-manipulation barriers to U.S. products. The increased consumption by foreigners of U.S. products would then pull the United States out of the recession.

Some people think that the increased U.S. government spending of World War II pulled the United States out of the Great Depression. They are incorrect. The Great Depression in the United States ended before our government spending started to increase. It ended in 1939 because of increased foreign buying of U.S. products by the warring countries of Europe. Increased foreign buying of U.S. products would pull the United States out of this recession as well.

Obama-Hu meetings: rhetorical success, practical failure

The meetings between American President Obama and Chinese President Hu on November 16 & 17 were a rhetorical success. The communique after the meetings flourished with plans to cooperate at some time in the future.

But, according to reporters Jonathan Weisman and Ian Johnson, writing just afterwards for the Wall Street Journal, President Obama was clearly looking frustrated at the press availability with Chinese President Hu afterwards. Here's their reading of the body language:

(T)he two leaders issued the statement in an awkward fashion—at a press "availability" where they took no questions, didn't address each other and exhibited body language that seemed to say they had been frustrated by the entire exercise....

White House Spokesman Robert Gibbs played down the lack of results:

White House spokesman Robert Gibbs said the president and his aides hadn't expected "the waters would part and everything would change over the course of our almost two-and-a-half days in China," adding, "We understand we have a lot of work to do."

After the first meeting, the two presidents had held a press conference together where they talked past each other on economic issues:

HU JINTAO: "We reiterated that we will continue to increase dialogue and cooperation on macroeconomic and financial policies and continue to consult, on an equal footing, to properly resolve and address economic and trade frictions, in a joint effort to uphold the sound and steady growth of our business ties and trade." "I stressed to President Obama that under the current circumstances our two countries need to oppose all kinds of trade protectionism even more strongly."

BARACK OBAMA: "Going forward we agreed to advance the pledge made at the G20 summit in Pittsburgh and pursue a strategy of more balanced economic growth. A strategy where America saves more, spends less, reduces our long-term debt and where China makes adjustments across a broad range of policies to rebalance its economy and spur domestic demand. "I was pleased to note the Chinese commitment made in past statements to move toward a more market-oriented exchange rate over time."

President Obama is testing a new American foreign policy strategy, based upon the power of rhetoric. Just a few days earlier he had given a beautiful speech in Tokyo in which he laid out the benefits to both sides of more balanced trade. America would get more exports to Asia which could create millions of American jobs. Asian workers and consumers would get a higher standard of living.

But why should the Chinese leaders change? Their mercantilist strategy (maximizing exports and minimizing imports) causes their economy to grow while the economies of their western rivals shrink. Soon they will have proven to their people and the world that totalitarianism can work better than democracy, when it comes to economic growth.

Obama's advisers did him a disservice when they sent him to China with only rhetorical arms. WTO rules give trade deficit countries a bludgeon through which they can force balanced trade. Specifically, WTO rules state:

(A)ny contracting party, in order to safeguard its external financial position and its balance of payments, may restrict the quantity or value of merchandise permitted to be imported.

Obama's advisors better wisen up soon, or they will have a failed presidency on their hands. Rhetoric alone does not cut it when it comes to foreign relations.

Krugman Nearly Gets It; Balanced Trade and Free Trade

Raymond L. Richman

Nobel Prize winning economist, Prof. Paul Krugman in his NY Times column on November 15, 2009, entitled World Out of Balance, writes: “the problem of international trade imbalances is about to get substantially worse. And there’s a potentially ugly confrontation looming unless China mends its ways.” He correctly notes that “Most of the world’s major currencies “float” against one another. That is, their relative values move up or down depending on market forces.” But:

China is the great exception. Despite huge trade surpluses and the desire of many investors to buy into this fast-growing economy — forces that should have strengthened the renminbi, China’s currency — Chinese authorities have kept that currency persistently weak.

Readers of this blog know that we called attention to this problem in our book, Trading Away Our Future (2008) and persistently on this blog since it was created a year and a half ago. Prof. Krugman is only now calling it to public attention. Moreover, his solution is to force China to allow the yuan to float. We are not as confident that floating the yuan will result in balanced trade. The Euro is allowed to float against the dollar and we continue to have large trade surpluses with Germany and France. Governments have other means to get and maintain a trade surplus, specifically a variety of mercantilist practices, including the obvious barriers to imports and subsidies to exports.

There is a simple solution which is in effect a revaluation of the yuan relative to the dollar and which is completely within our control and accords with the rules of the World Trade Organization. We could impose a tariff of, say, 35 percent against all imports from China. This would act just like a 35 percent appreciation in the value of the yuan. This would raise the import prices of imports from China and would stay in existence until trade between us is brought into balance. Moreover, the president already has the power to do this and the necessary bureaucracy is already in place.

Global Imbalances, the Sequel

A short paper "The Illusion of Improving Global Imbalances" by Richard Baldwin and Daria Taglioni of VOX examines the question of what is likely to happen to the global trade imbalances (e.g. the U.S. trade deficit) when [if] the global economy returns to more robust growth. They argue that the decline in trade imbalances is a short-term effect of delayed purchasing by companies and individuals around the world. The decline in global trade compressed the trade deficits and surplusses without addressing the underlying factors driving them.

If the world economy returns to growth, they project that the trade deficits and surplusses will pick up more or less where they were before, and trending worse once again.

China nixes Obama's balanced trade rhetoric

Howard Richman

President Obama is now in the midst of an Asia trip designed to produce more balanced trade so that American exports to Asia would jump start the U.S. economic recovery. Currently, China only lets its people buy about 25¢ for every $1 we buy from them, and other Asian countries recently resumed their currency manipulations so as not to lose market share to China.

In his speech at Suntory Hall in Tokyo on November 14, Obama said that the topic of balanced growth (i.e., balanced trade) would be discussed in Singapore the next day. He described his dream that balanced trade would benefit all sides. Specifically:

So we have now reached one of those rare inflection points in history where we have the opportunity to take a different path. And that must begin with the G20 pledge that we made in Pittsburgh to pursue a new strategy for balanced economic growth.

I'll be saying more about this in Singapore, but in the United States, this new strategy will mean that we save more and spend less, reform our financial systems, reduce our long-term deficit and borrowing. It will also mean a greater emphasis on exports that we can build, produce, and sell all over the world. For America, this is a jobs strategy. Right now, our exports support millions upon millions of well-paying American jobs. Increasing those exports by just a small amount has the potential to create millions more. These are jobs making everything from wind turbines and solar panels to the technology that you use every day.

For Asia, striking this better balance will provide an opportunity for workers and consumers to enjoy higher standards of living that their remarkable increases in productivity have made possible. It will allow for greater investments in housing and infrastructure and the service sector. And a more balanced global economy will lead to prosperity that reaches further and deeper.

For decades, the United States has had one of the most open markets in the world, and that openness has helped to fuel the success of so many countries in this region and others over the last century. In this new era, opening other markets around the globe will be critical not just to America's prosperity, but to the world's, as well.

An integral part of this new strategy is working towards an ambitious and balanced Doha agreement -- not any agreement, but an agreement that will open up markets and increase exports around the world. We are ready to work with our Asian partners to see if we can achieve that objective in a timely fashion -- and we invite our regional trading partners to join us at the table....

Then the next day, Obama flew to Singapore to join the meeting of Asian leaders at the APEC (Asia Pacific Economic Cooperation) forum. At the end of two days of discussion, Reuters reported that China and United States could not even agree to the mention of "market oriented exchange rates" in the final communique:

SINGAPORE (Reuters) - The United States and China sparred over exchange rates at a meeting of Asia Pacific leaders on Sunday, pointing to tricky talks ahead for President Barack Obama when he flies to China to address economic tensions.

The discord surfaced at a summit of the Asia Pacific Economic Cooperation (APEC) forum in Singapore when a reference to "market-oriented exchange rates" was cut from a communique issued at the end of two days of talks. An APEC delegation official said Washington and Beijing could not agree on the wording.

President Obama would have received a very different reaction from China were he to mention that America is thinking of adopting import restrictions to balance trade with China under the special WTO rule for trade deficit countries. If he were to auction Import Certificates allowing the same amount of imports from China as China imports from us, he could balance trade with or without Chinese cooperation.

China would not be able to respond with new tariffs on American products, as they did with tariffs on American nylon following Obama's tariffs on Chinese tires. Any new import restrictions that they would try would further reduce their exports to the United States.

But China does not think that they need to cooperate with this President. Are they correct?

Obama in Tokyo calls for balanced trade with Asian countries

Howard Richman

Balanced trade with Asia is the key to America's future economic prosperity. It would immediately jump start the American economy as trade moved to balance, and it would lead to investment in American manufacturing, so I am thrilled that President Obama is calling for balanced trade agreements during his visit to Asia.

Here's a selection of the relevant passages from a Bloomberg News article from November 14:

"We look to rising powers with the view that in the 21st century, the national security and economic growth of one country need not come at the expense of another," Obama said in an address to an audience of Japanese business and political leaders in Tokyo's Suntory Hall....

Obama called for unified efforts to block North Korea's nuclear-weapons development and stressed the importance of increasing U.S. exports to achieve greater balance with countries that sell far more goods to the U.S. than they buy from American companies.

The world financial crisis will lead to a rebalancing for the U.S. economy, which will mean "saving more and spending less," he said. Increasing exports will create millions of jobs in the U.S., Obama said.

The U.S. will support "an ambitious and balanced" trade agreement that will open markets, Obama said. He also vowed to work toward completing a trade agreement with South Korea and enter into discussions for a Pacific trade accord....

The U.S. will continue to approach its relationship with China based on American interests and will pursue areas of "pragmatic cooperation," he said. That includes emphasizing expanded human rights, he added.

These statements are excellent! The Chinese government is probably studying them right now, trying to figure out whether Obama will force them to give up mercantilism or not.