Healthcare: Price Controls and Shortages

As the final healthcare debate ramps up and certain moderate Democrats (and Joe Lieberman) become the last best hope for a bill that is something slightly less than a complete disaster, it is worth noting that underlying the scrambled mess that reform has become are some basic economic fallacies. The primary underlying problem is the purported view that rising healthcare costs have something to do with either the greed of the healthcare industry or some failure in the market. In this view, increased prices are a sign of moral failure rather than a signal that more economic resources are needed in the healthcare industry. Unfortunately, the rise in costs is not fundamentally a function of lawsuit abuse leading to higher malpractice insurance costs or a flood of illegal aliens crashing our healthcare system. While reforms in these areas would lead to some cost saving and are certainly worth pursuing, the primary drivers of increasing costs are increasingly effective technology and an aging population. All efforts at reform are bumping up against the reality that the population is aging at a faster rate than doctors are being produced (it takes years to produce a doctor or a new drug or a piece of innovative medical technology). This means that healthcare costs would be increasing in the absence of high medical malpractice insurance premiums and illegal immigration, and there is no reason to suppose that the same voices would not be calling for healthcare reform anyway.

Another problem that is being ignored is the effect of price controls, which is effectively what the healthcare bill is attempting to impose when everything is stripped away. While a purely market healthcare system would result in seniors paying a significant fraction of their income and assets to the healthcare industry as they aged (with the accompanying descent into old age poverty which makes this undesirable), government involvement that uses a system of effective price controls (even if it is in the form of a “public option” that artificially drives down prices) simply creates shortages. A staple of basic economics is that lower prices cause producers to produce less of a product. Setting prices artificially low results in less product being produced, but it also results in more of the product being demanded as well. While a government subsidy of healthcare bills for certain segments of the population (senior’s and the indigent) would lead to increased taxes (along with the associated economic cost), such a program would ultimately be less damaging in that it would lessen the political pressure for price control style reform, while allowing healthcare producers to obtain higher prices thereby leading to more healthcare being available.

In the current healthcare reform plan, it appears that we may end up with the worst of both worlds: an effective price control that produces shortages and a government plan that costs the taxpayers money to an extent that they can’t afford. A simple price control that was mandated by law would cause a shortage, but would not cost the taxpayer much. On the other hand, a subsidy of certain healthcare costs would cost the taxpayer money, but would have less of a shortage inducing effect. Unfortunately for the country, Obama has to have a bill and the Democrats control Congress. Even if the moderate Democrats can eliminate the worst aspects of any bill, the final product is going to be one that fundamentally ignores basic economic laws. As with ignoring the law of gravity, the outcome of ignoring economic laws is rarely pretty.

Risks And Opportunities For The GOP

With the Republicans fighting to prevent the wholesale government takeover of healthcare while looking towards the next election in 13 months, the political landscape is changing in ways that present them with some risks and some opportunities. While the last two months have been tough for the Obama Administration and the Democrats, Republicans who think that they can just sit back and let Democrat miscues carry them to victory next November are likely fooling themselves. While Obama’s approval numbers have dropped significantly since the beginning of summer, the Republicans have only really seen a modest improvement in their own numbers. Going forward, the Republicans face some serious, but not insurmountable, risks to their dream of recapturing one or both houses of Congress.

Firstly, the Republicans have not made any serious attempt to present an alternative health care reform plan. While they have been very successful pointing out deficiencies in the various plans and offering important suggestions for certain piecemeal reforms, the lack of a comprehensive reform package that they are willing to promote strongly and loudly makes the Republicans appear (whether fairly or not) that they are not really contributing any ideas. The Republican’s allowing themselves to be branded as the Party of No (as the Democrats will attempt to do) is not a strong argument for turning over the reins of government to them next November. A second risk is that the economy appears to be improving. While this won’t matter if unemployment stays high, the likelihood of unemployment going down increases as the economy improves. Ben Bernanke has generally not done a bad job considering the circumstances in which he was operating, and I don’t expect him to make a serious mistake that will negatively impact the economy over the short-term. An improving employment picture lessens the potential damage to the Democrats in next year’s election.

However, the recent shifting of the political winds has also presented the Republicans with some opportunities. Firstly, Obama’s radical lurch to the left has made the electorate more receptive to Republicans that at any time in the last five years. Secondly, in addition to the fact that off-year elections typically favor the party out of power, 49 Democrat House Members now sit in districts that were won by John McCain. While this advantage is tempered by the fact that 34 Republicans sit in districts won by Obama, that these Republicans survived the Obama surge makes it unlikely that many of them would be thrown out at a time when Obama’s popularity is hovering around 50%. Thirdly, Obama’s constant talking to the American people through various media appearances and press conference has likely overexposed him, meaning that people are beginning to tune him out. The fact that he has been shown to be untruthful regarding health care reform and his attempt to ram reform through without much debate in July and early August has likely damaged his credibility. Finally, an improving economy presents the Republicans with an opportunity to argue that the rest of the stimulus money (the majority of which has not yet paid out) should be canceled to save money. That this suggestion would be acted upon by Congress is unlikely, but it presents the Republicans with an opportunity to present themselves as more fiscally responsible than the Democrats.

If the Republicans are to win back Congress, they are going to have to present a coherent case to the American people that they should be given control. Although the political landscape is shifting in the Republican’s direction and will allow them to pick up some seats, it likely will not be enough by itself to carry them to a majority in at least one chamber. To take back one of the chambers, the Republicans are simply going to have to want it next November more than the Democrats and spend every moment from now until then working for it.

The Importance Of Federal Reserve Independence

As the Obama administration continues to shape the regulatory overhaul that is being conducted as a result of the financial crisis, one oversight measure that appears to have gained some support across party lines is giving the General Accounting Office broader authority to examine the Fed’s conduct of monetary policy. Of all of the actions that have been proposed in the aftermath of this crisis, decreasing the independence of the Federal Reserve by increasing congressional oversight is perhaps the one that has the potential to be most damaging to the long term health of the U.S. economy.

Contrary to popular perception, it is the Federal Reserve rather than the President that exerts the most powerful direct influence on the direction of the U.S. economy. While a President can propose policies and tax changes (which must then be approved by Congress), it is the Federal Reserve that controls the money supply and exerts influence on interest rates throughout the entire economy with no input from Congress or the President being required. The Fed uses monetary policy to try and fulfill two of its major goals which are to promote full employment and maintain price stability (i.e. mitigate inflation). Unfortunately, any action that the Fed takes to control one has the effect of exacerbating the other. For example, the Fed’s response to the current crisis has been to flood the U.S. economy with dollars (i.e increasing the money supply) in an effort to get the economy going again (and thereby increase employment). However, actions of this sort tend to increase inflationary pressures. At some point in time, it is likely that the Fed will have to begin contracting the money supply to combat inflation.

Given that the Fed must walk this tightrope, it is imperative that the Fed not be subjected to the political pressures that increased congressional oversight would likely bring. The power that the Fed exerts over the economy means that politicians will necessarily attempt to use their power to shape Fed policy actions in a way that the politicians believe will enhance their electoral prospects, rather than what is necessarily best for the long-term health of the economy as a whole. The potential for congressional meddling will inject another element of uncertainty into financial markets and business decisions as investors will need to engage in political calculations (along with the normal economic analysis) when making an investment/business decision based on macroeconomic factors. This additional uncertainty will likely lead to higher interest rates than would otherwise be the case as investors demand compensation for the additional risk, which will likely have the effect of lessening economic growth over the long run.

While there is no doubt that policy mistakes by the Fed (i.e. keeping monetary policy too loose for too long) helped to fuel the real estate bubble and contributed to the ensuing crisis, these mistakes were made while the Fed was trying to do the best job that it could in fulfilling its mandate. The idea that increased congressional oversight would improve monetary policy is doubtful at best. Federal Reserve independence is too important to be tossed aside in the political turmoil of a crisis period that will eventually pass. Increasing congressional oversight of the Fed is an idea that should be scrapped.

Obama’s North Korean Challenge

Over the last 2 months, the world has been treated to a familiar pattern of North Korean saber-rattling. From conducting a nuclear test, to firing off missiles, to declaring that it no longer considers itself bound by the 1953 armistice agreement, the North seems determined to see how far it can push Obama. In the past, bad behavior from North Korea has been rewarded with concessions in an effort to entice the government of Kim Jong Il back to the negotiating table. While the Obama team has been vigorously trying to blame the problems that the U.S. is currently facing on failings of the Bush Administration, few people believe that a Democrat administration would have done anything substantially different to try and stop North Korea from obtaining nuclear weapons. Indeed, Obama’s policy on this issue has been substantially the same as Bush’s was in the last two years of his tenure in office. Whether he realizes it or not, Obama’s foreign policy will be judged in large part on how he deals with North Korea.

If Obama wants to be judged more favorably than his predecessor on this issue, then he needs to accept some realities that many on both sides of the political aisle do not yet appear to have accepted. While the recent passage of a U.N resolution condemning North Korean actions signals Russian and Chinese displeasure with Kim Jong Il, those in the Obama administration who believe that it also signals that Russia and China intend to get serious about these issues are bound to be disappointed. What should be abundantly clear now to everyone is that China and Russia do not consider it in their interest to solve the North Korean issue. While the rest of the world would cheer a collapse of Kim Jong Il’s regime (like East Germany in 1989), neither China nor Russia (nor even really South Korea) relish that thought. Such a collapse would likely lead to a massive refugee exodus into China and South Korea , with all of the headaches that would result from it in the short run. In the long run, a reunited Korea would likely put a U.S. ally on China’s doorstep, something that China probably views as a threat. As for Russia, their foreign policy calculus seems to be “if it is good for the U.S., then it is bad for us”. Consequently, while they may not want to see an all-out war on the Korean peninsula, a nagging foreign policy problem that continues to be a distraction for the U.S. is probably seen as desirable by them.

Until Russia and/or China see that it is in their interest to disarm North Korea, they are probably not going to be much help in this endeavor. Consequently, the Obama administration needs to prepare for a Cold War-style containment/military preparedness strategy, with regime change as its ultimate goal. On the diplomatic front, the Obama administration should consider making diplomatic gestures in favor of rearming Japan. Not only would such a move send a message to North Korea (as they haven’t forgotten 40+ years of Japanese occupation), but it will also put China on notice that a no longer pacifist Japan may be welcome once again in the community of nations. A rearming of Japan in the face of the North Korean threat might just be the incentive that the Chinese (who also haven’t likely forgotten their own occupation by the Japanese) need to convince them to provide assistance in the removal of that threat.

In dealing with North Korea, success requires that the Obama administration be forceful and purposeful. Ironically, Obama has more leeway to be tough with North Korea, since the adoring media likely won’t unleash a storm of criticism and opposition like it would have done in response to tough actions by Bush. In dealing with this challenge, Obama has an opportunity to help his Party alter its image of weakness on foreign policy by accepting the current realities and making the proper decisions. On the other hand, if Obama decides to continue to operate under the fictions of the past, then he will deserve all of the criticisms that Republicans and others will heap upon him. The next few months should be very interesting.

California Supreme Court Defends Democracy……………And The Rule Of Law.

Last week, despite coming under enormous pressure from the Democrats, the Governor, the media, and other assorted interest groups, the California Supreme Court resisted inflicting a major wound on democracy and affirmed that the people of California have the right to amend their Constitution as they see fit. By voting to uphold Proposition 8, the Court delivered a stinging rebuke to members of the political class who had revealed their contempt for democracy and the democratic process by urging the Court to overturn a voter-approved constitutional amendment. While there is certainly a case to be made that California’s voter initiative/constitutional amendment process has been abused by special interests to insert favorable amendments into the Constitution (resulting in the 3rd longest Constitution in the world by some estimates), the process is still legal in this state. The willingness of many in the political class to advocate the invalidation of a decision reached by legal and democratic means, for no other reason than that they disagreed with that decision, bespeaks an arrogance and disdain for the views of their fellow Californians that could possibly prove problematic for California’s long-term future as a democratic republic.

At the same time that the Court was upholding Proposition 8, it was also validating roughly 18,000 same-sex marriages that were performed in the state while such marriages were legal. While the original Court decision legalizing same-sex marriage was a classic case of judges usurping authority and reading their personal preferences into the Constitution, attempting to invalidate these marriages would have struck a blow against an important legal pillar upholding a stable society. It is a generally accepted legal principle that a contract that is legal at its inception should not be retroactively invalidated. By dissolving these marriages, the Court would have violated this principle and thereby injected an element of legal uncertainty into every transaction in California, as one could then never truly feel secure that a future legislature or court might not just invalidate retroactively another type of currently legal contract. A free and stable democratic society requires security that currently valid contracts are going to be enforceable going forward in order to function smoothly. While the Court was never constitutionally justified in legalizing same-sex marriage in the first place, invalidating these marriages would likely have been a case of the cure being worse than the disease.

Now that the Court has reaffirmed that California is actually a democracy, the battle over same-sex marriage will be continued at the ballot-box where it belongs. A political class and a media that have apparently their lost reverence for democratic and legal processes cannot be counted on to defend the people’s right to govern themselves. Fortunately, California still has a Supreme Court that is willing to guarantee that right. For that, all Californians can be grateful.

An ‘Empathetic’ Judge: A Long-Term Danger To A Free And Civil Society

Now that Obama’s much anticipated ‘empathetic’ appointment to the Supreme Court has been revealed, one can be forgiven for feeling that one is perhaps witnessing the next step in the country’s transition from a nation ruled by laws to a nation subject to the arbitrary rule of judges. To be sure, this process has been underway for nearly 2 generations, and Obama’s announced search for ‘empathetic’ judges who will legislate from the bench can be seen as merely doing openly what Bill Clinton (and other Democrats) have done in secret. While generally not popular with the public in theory, it is an unfortunate fact that what we conservatives refer to as ‘judicial activism’ has become a mainstream judicial practice. While the public at large still currently appears to see judges as honest interpreters of the law (and Constitution), this image will likely be undermined by Obama’s actions and judicial choices.

Contrary to what may be supposed by the political class, an orderly society does not spring forth from laws, but from the public’s willingness to see those laws (and those who enforce and interpret them) as legitimate. If the public broadly comes to see a ‘law’ as nothing more sacred than an individual judge’s opinion, respect for the law will be diminished (and not easily rebuilt). A society that loses respect for the law is not one that can remain stable and free. Either society will start to break apart as legal anarchy begins to take hold (political instability), or the state must become extremely powerful in order to coerce compliance out of a citizenry that has lost respect for it (lack of freedom). Obama’s choice for the Supreme Court, as well as his open search for judicial ‘legislators’, is pushing the U.S. further down a potentially dangerous road.

The ‘Specter’ Of A Permanent Minority Party

With Arlen Specter’s defection to the Democrats, the Republicans have taken a blow that practically eliminates their influence in Washington. Despite brave talk from certain activists and Party leaders, the Republican Party is in a major crisis that will not likely be resolved by a 2010 replay of 1994, with a resurgent Republican Party retaking control of Congress. A collapse such as the one the Republicans have undergone (losing the White House and both Houses of Congress in 3 years) does not occur because a political party puts up a bad candidate for President, or because of a biased media establishment, but is rather an indication that a party has taken a wrong turn at some point. While many in the Republican Party are debating what errors were made, there are clearly several that have combined to largely remove Republican influence from Washington for the time being.

Firstly, the Republicans have lost their traditional advantage over the Democrats on foreign policy, largely due the handling of the conflict in Iraq. The failure to find stockpiles of WMD’s and the lack of preparation for what would come after major combat operations made the Bush Administration (and by extension Republicans) appear incompetent. Continued exhortations to “stay the course”, rather than help matters, actually ended up making the Administration look helpless.

Secondly, the Republicans have lost their traditional advantage as having the reputation of being the Party of fiscal responsibility. When the Republicans were in control of Washington, they abandoned their small government, fiscally conservative roots. Not only did a Republican Congress massively increase government spending, but a Republican President appeared to be unaware that the office of U.S. President comes equipped with a veto pen. Now that Obama and the Democrats are massively increasing the size of government beyond what the public appears to be comfortable with, the Republicans currently lack the credibility on the issue to mount an effective opposition to them.

In addition to losing credibility on a couple of issues, the Party has taken it upon itself to shrink its base. Under Reagan, the Republican Party was truly a “big tent” Party that was able to integrate different people with somewhat differing views. Today, the Party has become more homogenous on issues to the point where it has effectively exited New England, being unable to produce congressional candidates (apart from a couple of Senators) with values and opinions that play well in that part of the country. While Arlen Specter is an opportunist who was always going to do what was best for himself, the vitriol from some Republicans that accompanied his vote for the Obama budget (words like ‘traitorous’ and ‘retribution’) sent a signal to people who might be open to Republican ideas that they are not welcome, if they differ in any way from what is considered to be Republican orthodoxy. While this state of affairs may be acceptable to certain Party factions, it is not the way to build a truly national party or a lasting Republican majority.

Until the Republicans broaden their base and restore their credibility on certain issues, they will continue to lose elections. While some in the Republican Party appear to have recognized the need to restore the Party’s credibility on certain issues (i.e. returning to small government roots), many still view the term ‘compromise’ with disdain. Politics, however, is about the art of the possible, and some compromise is necessary if one is to build a dominant political party. A Party that is broad-based and wins elections furthers the goals of its factions more effectively than one that remains ideologically pure, and yet fails to win elections (and power). The treatment of Specter, and other Republicans with views similar to his, indicates that the Republicans have not yet absorbed this lesson. Until they do, they will be forced to learn another lesson: how to live as a permanent minority political party.