IMF: The US needs to act in order to avoid Greece’s fate

From the Financial Times.

I’m just going to give you the important part:

The Fund has calculated that almost all advanced economies need to tighten fiscal policy significantly in the coming decade in order to stabilise debt at 60 per cent of national income by 2030 and the tightening needed in the US, Japan and the UK is just as bad as that required in Greece, Spain, Ireland and Portugal.

The US must tighten fiscal policy by 9 per cent of national income to achieve a stable position, the Fund estimates for example, something Mr Buiter believes its politics will make very difficult. “The way things are now, the Republicans will veto all tax increases and the Democrats all public spending cuts,” he says.

This week, a survey of former senior US economic officials, unanimously agreed the US was on an unsustainable path and warned that there would be another economic crisis in the US unless the deficit was addressed.

Peter G. Peterson, chairman of the non-partisan Peterson Foundation said: “It is significant to see such an overwhelming proportion of these former senior officials, Republicans and Democrats alike, agree that we must address our long-term structural deficits to avoid another economic crisis, and that we must do so now.”

The consequences of inaction? We can take a look at Greece, but really that’s the best case scenario. The US cannot be bailed out – it really is Too Big To Save. From The Economist:

A three-year reform programme being put together by the IMF, the European Commission and the ECB aims to cut the budget deficit from 13.6% to 2.7% of GDP in just three years, an ambitious target in a shrinking economy. A new pensions law, which is due to be adopted in May, will raise the retirement age for both men and women and reduce the pensions paid by state-controlled corporations. Applications by civil servants to take early retirement under the existing scheme have already jumped by 30%.The overstaffed public sector will be severely pruned. No one is certain how many jobs will go. But if the programme is rigorously implemented, more than 100,000 Greek public-sector workers will be put out of work by 2013—by a government that came to power promising “more social protection”.

Note that in Greece, a public-sector job is supposed to be permanent.

Basically, all of the things we need to do anyway will happen all at once. Social Security age will jump immediately because we can’t afford it. Medicare will get slashed effective immediately because we can’t afford it. The new healthcare program? Also slashed. Why? Because these are the biggest budget items. All others (besides Defense and interest on the debt) account for about 15-18% of the total budget. And if we’re in crisis, that number will be lower because the crisis will be caused by soaring medical costs driving Medicare costs and higher interest rates driving up the cost of financing the debt.

So who pays? Government employees, who thought they had secure jobs, suddenly are laid off with no warning. Seniors who depend on Medicare suddenly find their benefits scaled way back and out of pocket costs for them skyrocket. Anyone who foolishly (don’t let this be you) depended on Social Security to fund their retirement finds they can’t retire.

Here is the reality: We know what we need to do. We can do it now so people can alter their plans and adjust slowly, or we can do it all at once when a crisis is upon us.

Update: Note that if Greece does default, as predicted by a very experienced emerging market investor, then it could be just the first. Portugal, Spain, Ireland, Italy, and perhaps Hungary may follow. Here’s a post on how sovereign defaults, a few years after the 1929 crash, were really the bottom of the Great Depression. Things could get very bad.

Pay attention to Greece

I assume that readers of this blog are not really paying attention to the debt problems and potential default faced by Greece, but you should. The reason why is that it is an example of a “rich world” country whose politicians gave generous handouts to it’s citizens without the taxes to pay for it. My personal feel is that there is a higher probability that the US will have a debt crisis like Greece than there is of a major climate change problem.

I’ll post at some other time about the specifics of the US debt problem, but here is a summary: if our politicians do nothing, entitlement spending will put us in the same position as Greece by 2030. Yes, just 20 years from now. Debt will be over 100% of GDP, Deficits will be 9.4% of GDP, and debt will be about six times annual tax revenue. And the way it will happen is what is called a “sudden stop” as in, markets have full confidence right up until they don’t any more. The Greeks were doing just fine until the cost to finance their debt jumped:

The primary cause of the US Debt problem is health care expenditures, which have still not been addressed; they have been increased with the new health care bill. Fixing Social Security by increasing the retirement age is unpopular, but simple, and needs to be done sooner rather than later so people can alter retirement plans as needed. Fixing the health care cost problem is unpopular, complex, and much larger.

Senate planning to regulate health insurance premiums

From the New York Times:

Fearing that health insurance premiums may shoot up in the next few years, Senate Democrats laid a foundation on Tuesday for federal regulation of rates, four weeks after President Obama signed a law intended to rein in soaring health costs.

Not sure how this will work. If the underlying health care costs continue to rise, but the amount of money insurance companies collect is capped, then that seems to me to be government mandated bankruptcy. Perhaps this is a hidden way to cap health care expenditure without directly taking on doctors. Normally, I’d say “Price caps lead to scarcity” which they do in a normal market, but since the government now mandates coverage and mandates benefits, I’m not sure how this will turn out.

But make no mistake, this bill, if it passes, will mean the government runs our health care. You may like that or not, but it is. And, as many have said so far, the health care bill just passed is the beginning, not the end.

mandates again

Everyone who advocated for coverage of everyone with no regard to pre-existing conditions always included an individual mandate. I’ve blogged on this before, but can’t find it now. The idea is that if you don’t allow an insurance company to charge people different rates for varying health conditions, you must have the whole population in the insurance pool to keep the average cost down. This is because the healthy, who are by definition charged more to pay for the sick, won’t do it otherwise. So keeping them insured and paying premiums is vital to keeping costs from ballooning. More on that effect here.

So, the efficacy of mandates is quite important. Of primary importance is the individual mandate – this is getting the young and healthy individuals who are not currently insured into the pool. Austin Frakt has done some in depth analysis and thinks the mandates are sufficient. I hope he’s right because if not, this thing is going to come apart fast. He compares the mandates to Massachusetts where they seem to be effective (in the sense that north of 97% of the population has insurance and people are not gaming the system).

Tyler Cowen rightly brings up the enforcement issue – i.e. how will it be enforced. It seems that it will be tied to your tax return, but will not have the same collection mechanisms (i.e. wage garnishments, interest payments, etc.) as tax payments. That seems pretty strong. Then, finally, there is the cultural issue – i.e. does skipping the mandate somehow become a cultural norm (i.e. ‘cool’) or does it become looked down upon. The mandate is strong enough, that if there is cultural pressure as well, then it might just work.

Now, even this is no paradise. Massachusetts, even with it’s mandates “working” has seen it’s health care costs rise faster than the national average since it’s reform packages was passed.

Now, the business mandate is another story. It seems totally inadequate, according to John Cassidy:

Take a medium-sized firm that employs a hundred people earning $40,000 each—a private security firm based in Atlanta, say—and currently offers them health-care insurance worth $10,000 a year, of which the employees pay $2,500. This employer’s annual health-care costs are $750,000 (a hundred times $7,500). In the reformed system, the firm’s workers, if they didn’t have insurance, would be eligible for generous subsidies to buy private insurance. For example, a married forty-year-old security guard whose wife stayed home to raise two kids could enroll in a non-group plan for less than $1,400 a year, according to the Kaiser Health Reform Subsidy Calculator. (The subsidy from the government would be $8,058.)

In a situation like this, the firm has a strong financial incentive to junk its group coverage and dump its workers onto the taxpayer-subsidized plan. Under the new law, firms with more than fifty workers that don’t offer coverage would have to pay an annual fine of $2,000 for every worker they employ, excepting the first thirty. In this case, the security firm would incur a fine of $140,000 (seventy times two), but it would save $610,000 a year on health-care costs. If you owned this firm, what would you do? Unless you are unusually public spirited, you would take advantage of the free money that the government is giving out. Since your employees would see their own health-care contributions fall by more than $1,100 a year, or almost half, they would be unlikely to complain. And even if they did, you would be saving so much money you afford to buy their agreement with a pay raise of, say, $2,000 a year, and still come out well ahead.

Now, this could also be a feature, not a bug. Basically, what this means is that for most firms, starting with the smallest, will have pretty strong economic incentives to drop their health coverage and put people on the exchanges. What this does is create an individual market for health care insurance. Since, the employer-based care was one of the biggest problems with the system, this could be a pathway out.

Things to like in the health care bill

1. The Independent Payment Advisory Board (IPAB). This was set up as a part of the Affordable Care Act (The official name of the Health Care Reform bill). What it does is set up an independent commission, separate from Congress which will make recommendations on how to save money on Medicare. Ezra Klein has more here. He’s soul-searching a bit because it seems that it takes removing this sort of thing from Congress to get it done. I’m not surprised, he seems a bit disturbed.

Anyway, he is right that the IPAB has a lot more power than anyone would have thought it could have – an interesting product of the way this bill was passed. Basically, if the IPAB makes a recommendation to cut some price or remove some coverage from Medicare (politically unpopular, no doubt) then it automatically becomes law. Congress has to act in order to stop it. And then the president has to sign it. This is a really, really high threshold because basically it means that a Congress has to pass a law, signed by the President, to stop it.

Now, do not underestimate the political power of seniors. They care, they are active, and they vote. So I’m sure there could be broad, bipartisan support for emasculating the IPAB on an annual basis – it could end up just like the annual repealing of the 20% Medicare reimbursement cut we already have. But I like this a whole lot better than other options.

2. The Cadillac Tax. Now, as I said before, this could end up applying to a large number of people. But that could be a feature, not a bug. If expensive health care plans end up being taxed, then we may get pressure to deliver cheaper health care plans. Those may end up being more targeted with more consumer choice (Does every 40 year old woman need comprehensive pregnancy coverage? Even if she’s had her tubes tied? Right now, she does and pays for it.). Basic economics says if you tax something, you get less of it. So this may be one dampening force on the ever rising costs of health care.

Again, don’t hold your breath. The politics of this may be that this tax never actually happens – unions oppose it vehemently and the right seems to be against anything remotely called a ‘tax’ so it could also be removed before it goes into effect in 2018  with broad, bipartisan support and little debate.

The evolution of health care: a less optimistic take

By Bryan Caplan. His concern is with problems around fines and mandates, and his source is the 7 page summary document put forth by the White House.

Issue 1: “Immediate Access to Insurance for Uninsured Individuals with a Pre‐Existing Condition.” Most see this as a benefit, but it may not be so. If insurance companies cannot use your health information to set premiums, then rates go up for everyone. Imagine if the car insurance company was not allowed to pull your driving record to set your car insurance rates. They’d have assume you were an average-to-bad driver (health) and charge you accordingly. Then what? Since the good drivers (health people) are overcharged, they are the most likely to try to go without (they are, after all, good drivers). So, the healthy opt to pay the fines. That means the average population seeking insurance are actually more sick the the population at large. As the insurance company figures this out, they charge higher premiums. Now, the moderately healthy are getting a bad deal, so they opt out and pay the fine. Repeat. This is a classic adverse selection problem which people claim was present in the insurance industry, but it is only present when you cannot (or are forbidden to) determine the actual health of the insured (or driving ability of the driver). Note that while the coverage is mandated in 2010, the fines for not buying health insurance don’t arrive until 2014. So, the healthy are actually incentivized to skip insurance now (too expensive), pay no fine, and once/if  they get sick, and then get it, since they can’t be denied.

Issue 2: The fines are not high enough. The bill:

Requires most individuals to obtain acceptable health insurance coverage or pay a penalty of $95 for 2014, $325 for 2015, $695 for 2016 (or, up to 2.5 percent of income in 2016), up to a cap of the national average bronze plan premium. Families will pay half the amount for children, up to a cap of up to a cap of $2,250 per family. After 2016, dollar amounts are indexed. If affordable coverage is not available to an individual, they will not be penalized.

I guess we’ll see if these fines are enough. I’m guessing that $95 per year is not likely going to do much. 2.5% of income sounds closer, but it depends on how much the alternative costs – i.e. how much health care costs (even with the subsidies).

Issue 3 I let Bryan take:

3. While new regs penalize firms that don’t offer insurance, the penalty seems to asymptote to $2000/employee:

Requires employers with 50 or more employees who do not offer coverage to their employees to pay $2,000 annually for each full‐time employee over the first 30 as long as one of their employees receives a tax credit. Precludes waiting periods over 90 days. Requires employers who offer coverage but whose employees receive tax credits to pay $3,000 for each worker receiving a tax credit up to an aggregate cap of $2000 per full‐time employee.

I have a feeling that post-recession jobs are going to be a lot less likely to offer health insurance.

Remember, employers don’t get subsidies. So, assuming annual premiums costs something like $12,000 for a business to provide, even with the tax deduction, I don’t think it will compare with paying a $2,000 fine for not providing it. Now, I doubt large businesses will opt out en masse, but I do expect firms in the 50-500 employee range to seriously consider simply dropping coverage and paying the fine.

Finally, issue 4:

4. The “Cadillac tax” doesn’t kick in until 2018.  But given the regulation-induced adverse selection problem, plus many other provisions to hobble discount insurance, I wouldn’t be surprised if half of the insured ended up paying it:

based on this from the White House doc:

Tax is on the cost of coverage in excess of $27,500 (family coverage) and $10,200 (single coverage), increased to $30,950 (family) and $11,850 (single) for retirees and employees in high risk professions. The dollar thresholds are indexed with inflation…

The key thing is that the tax is indexed to inflation but health care costs have been rising much, much faster than inflation. Inflation is typically 2% per year, health care costs have been rising at close to 10% per year (loose estimate. A lot more than 2%). Either way, what this means is that more and more plans will be considered “Cadillac” plans and be taxed even as these “Cadillac” plans become the average coverage most Americans use.

Health Care – Economic Implications

$800B of the $900B cost of the health care bill is subsidies – i.e. payments from the government to individuals or families to help pay for health care. This is necessary for the mandate part of the bill to be remotely feasible. Most people want health care, they simply can’t afford it, so fining them won’t help. They need subsidies to pay for expensive health care.

The problem is that subsidies cause higher spending on the thing subsidized as we all worry about the burden of higher health care costs. We’ve done nothing to lower costs, we’ve simply shifted them from the uninsured and underinsured to the government (i.e. all of us taxpayers who fund the government’s operations).

Remember Cash for Clunkers? How about the first time homeowners tax credit? Both are subsidies – the government handing out money to assist people in buying cars and houses. What was the goal? To increase purchases of cars and homes. So, we now subsidize health care without cost controls means we ease the pressure on doctors and hospitals to lower costs: the government is now helping all sorts of folks get health care. But this was the point, wasn’t it?

The problem is that by releasing this pressure, we will see costs rise again. Markets work like this: if prices rise, many people get priced out of the market, which causes demand to drop. This drop in demand means that less gets sold at those higher prices. Competition then rewards the innovator who can provide the same service for less – they get no only those who have exited the market due to higher costs, but will also get some switching who were paying more. Thus prices go down. This competition mechanism is what is broken in the current system – we only see the cost of healthcare via monthly or annual premiums, not each time we go to the doctor, so the cost-consumer link is separated by space and time. And this bill continues to separate them for those who are assisted by it:

The second part of the subsidies, estimated to cost $466 billion during the next decade, would limit out-of-pocket expenses for deductibles and co-payments. This help, for individuals with salaries of $27,000 and families with income of $55,000, would be significantly more generous than any version of the legislation Congress has considered.

What we now know is that 50 million uninsured and premiums at $10-12K per year (or whatever they are now) is a socio-political breaking point. The current legislation will provide subsidies to ease this tension by reducing that annual cost with subsidies and reducing the uninsured to about 20 million or so. But, what happens now? With no cap on the cost and no incentive with copayment or coinsurance to say ‘no’ to procedures, the cost of healthcare will continue to rise until the costs after subsidies are once again $10-12K per year and we again have 50 million uninsured, but now we’re spending billions each year, let’s say the subsidy is $8K per family, so now the total cost is $18-20K. What happens now? Those same folks are again priced out of the market, and Congress is forced to increase the subsidy. Or, perhaps, they do this:

One part of the subsidies would consist of tax credits to help Americans afford insurance premiums, guaranteeing that they would not spend more than a specific portion of their income for them, ranging from 3 percent to 9.5 percent.

Which guarantees that nobody is priced out of the market, but guarantees that as the costs continue to skyrocket, the government picks up the increase, year after year.

And then what? Remember, Medicare and Social Security are mandatory spending on entitlements, just like this health care bill. In 1965, they accounted for about 25% of federal expenditures, now they are around 55% of spending and growing. Defense spending? About 50% in 1965 and about 20% now.  All other spending has been basically flat.

The problem is that Medicare, Medicaid, Social Security, and now this Health Care entitlement are all mandatory (in that no politician will touch them), mostly tied to an aging baby boomer population, and highly linked to rapidly escalating health care costs. I do not see how this ends well for us as a country. If the debt markets start losing faith in the US and the interest we pay on our growing debt starts going up, this will go from ‘bad – we should do something’ to ‘terribly awful – our government may default on it’s debt’ really fast. Things like hyperinflation or a massive dollar devaluation (both basically the same thing) follow. We are not that different from Greece.

Politics and Politicians

There has been a lot of angst and anger amongst liberals and progressives following the defeat of Susan Crowley in the Massachusetts Senate race. It seems that the Health Care bill is now on its death bed. But that is not the topic today.

First, we start with Tyler Cowen, “A Simple Theory of Political Jobs“:

Political jobs would be torture for most people.  You have no freedom.  You are underpaid and over-bugged.  You lose a lot of your privacy.  You have to stop writing emails or saying what you think.  You don’t get to read many good books or go for many quiet walks.  It’s hard to be a non-conformist.  And so on.

Yet it’s really hard to get top political jobs.  So who gets them?  People who truly, deeply love the power.

Plus “doing what the voters want” very often feels like, or can be described as, “doing the right thing.”

I have a keen interest in politics and the idea that government, done well, can truly help. But I will never be a politician because of the environment described above. He didn’t even mention the bureaucratic junk you have to deal with every day.

I think regardless of how you slice it, you have politicians who care primarily about getting power, then staying in power. And herein lies the problem. Things like Health Care and Climate Change, in particular, are things that need to be addressed, but require short term pain in order to get the long term benefit. The Health Care bill the Dems tried to pass we a massive giveaway that was pretty transparent to all. Most liberal/progressives supported it on the grounds that the uninsured need help no matter what, conservatives and libertarians opposed it on the grounds (primarily) that it was vastly unaffordable in even the medium term. To pass health care reform, it will be necessary to reduce the amount and type of care we all get. The question is who will do it an how? The current bill doesn’t do that – or rather it claims to, but anyone looking at the recent past knows that the “medicare reform” was never going to happen because as soon as the AMA opposes it, congress backs down like they do every year with the medicare reimbursement reduction that they suspend annually. And “evidence-based medicine” was never going to fly either as we saw with the very simple case of mammograms. The fact is, Congress is not willing to stand in between a patient and their doctor.

We see a similar pattern in Climate Change. Until I hear a majority of congressmen saying “This bill will raise the price of energy – that is the whole point” I won’t really be paying all that much attention. There are lots of shenanigans about cap-and-trade, and “frameworks” for progress, etc. but right now, the vast majority of Americans are not willing to pay more for gasoline (for their cars or indirectly in the price of virtually everything we buy that is shipped via truck) to avert climate change. Until they are, this one isn’t going anywhere. The infrastructure for burning fossil fuels gives them such a huge head start on alternative energy that all the subsidies in the world are not going to help in the short to medium term. And so, I predict nothing will happen in the US for a while on climate change. Things will have to get a lot worse before that happens.

And you know what? This is, on the whole, good. I think the Democrats vastly overestimated their “mandate” when Obama was elected because there is no such thing as Blue/Red and all that stuff is really overblown. Many moderate locations (Congressional Districts and States) very slightly crossed from R to D in 2008 and the Dems threw a party. Well, the new folks weren’t that different from the old folks, they just had (D) after their name. They still represent the same set of people. And I think on Health Care, the majority of Americans are not willing to pay a ton of money for an incremental extending of care to uninsured – it was not the reform they wanted. And now congress responds.

What to do about health care? I like this from Megan McArdle:

Raise the Medicare tax by half a percentage point, and eliminate the tax-deductibiity of health insurance benefits for people making more than $150K a year in household income, $100K for singles.  Then make the federal government the insurer of last resort.  Any medical expenses more than 15% or 20% of household income, get picked up by Uncle Sam.

It is incremental change in the right direction, while reducing the life-dislocating problems of massive health care bills. Because it the federal insurance is a % of income and health care costs are not related to income (directly) it will disproportionately help low income folks who find themselves very ill. But the threshold is high enough that it won’t be too attractive to people to skip insurance altogether.

And so it goes…

At least cost effectiveness research will keep health care costs down.

I’ve been a bit busy, so I’m a little late to this. The senate just passed an amendment to the current health care bill which will include mammograms as mandated coverage.

The problem is this:

A panel of experts, appointed by the federal government, recently changed its recommendation and said that such routine mammograms should begin at age 50 rather than at age 40.

Yet, what did the politicians say? They say that is just a general guideline and that really, if the doctor says you should get it, then you should get it and it will be paid for.

The Democrats’ health care bill would generally require insurers to provide preventive treatment recommended by the expert panel, the United States Preventive Services Task Force. But lawmakers in both parties made clear that they wanted doctors to decide when a mammogram is medically necessary and that insurers should be required to cover the cost if the procedure is needed.

Now, I’m risking sounding like I’m some hater of women’s health. Who could be against mammograms? Surely, they have saved many lives. True. But this is a small example of a much, much larger problem. When a group of experts got together to determine when mammograms should be given, they came up with age 50 as the optimal cost-benefit age. This is because they determined that giving mammograms to younger women in general was a waste of health care spending. The fact is that we cannot afford to give tests to everyone in order to absolutely maximize the chances of early detection of cancer with no regard for cost. I’ve discussed this general concept earlier – it is a form of rationing. Also, more on prevention here.

You don’t have maximal car insurance because it is expensive. You don’t have a top notch security system because it is expensive. Yet, we all want maximum security, right? These things are rationed by price and over time, we get better insurance and better security for less money as businesses innovate and compete.

If we continue to want to have any test for free as early as possible, we will indeed maximize early detection and prevent a lot of cancer, but it will be really, really expensive. The problem is that for us, it will be “free” but we all will pay the bill. We cannot have “insulation” – we need insurance. Which must have its limits, somehow.

on doctors pay

I’ve been talking a lot about health care costs. A natural question to ask then, is “Are Doctors Overpaid?” There are a few ways to look at this. I’m pretty sure (can’t find it now) that there has been a worldwide comparison of doctors salaries and those in the US make more than many, if not all, countries. Thus, it would stand to reason, doctors pay is a key component of US healthcare costs.

Not so fast, my friends! New research by Sherry Glied, Ashwin Prabhu, and Norman Edelman says that doctors are not overpaid. How? They compare doctors pay to similarly skilled and trained individuals who choose to do something else and find their pay is the same. Essentially what they are saying is that the high pay is attracting highly skilled people who, if the pay were less, may choose to do something else.

Now, I’m not saying that all doctors are money grubbers who would ditch their career in a heartbeat if their pay was less. Rather, I’m saying we need to be very, very careful in what we advocate for change. Capping doctor’s pay, for instance, may have a bad outcome. This will not likely have an immediate effect, but in the long run what it may mean is less skilled people choosing to become doctors and more skilled people becoming…whatever, lawyers, environmental engineers, etc.