Social Security and the fiscal event horizon

The Ides of March, 2010 may be remembered as the day the entitlements crash began. Social Security liabilities exceed inflow, and SSA has begun tapping its vault full of Treasury bonds. “Too bad” (as the AP story notes) “the federal government already spent that money…”

Technically, Social Security is now broke. Since it’s politically unthinkable to admit this, the Treasury will have to go cap in hand to the bond markets and buy more short-term debt in order to keep the benefits flowing. This will heavily increase a structural federal deficit that is already unsustainable.

The government will fail to do anything meaningful to address the problem — because there is nothing it can do. Cutting payouts isn’t on the table, not for an administration ideologically committed to redistributionism.

Nor will raising taxes work. According to the Tax Foundation’s figures we’d have to triple the tax rates on the top 50% of earners just to cover the Federal FY 2009 budget of $3.55 trillion, let alone cover any debt or accumulate revenue for future years. And the bottom 50% only pays 2.89% of revenues; there’s no money there.

The next stage of this slow-motion train wreck will arrive when the bond rating agencies admit that the U.S. is broke and not going to get un-broke, and downgrade the risk rating on Treasuries from AAA. There’s already talk of this and warnings from the agencies; I can’t see it being more than nine months out at this point. If Obamacare actually passes, expect the downgrade sooner rather than later; vaporous talk of “bending the cost curve” isn’t fooling anyone with actual money on the table.

When Treasuries get downgraded, the Treasury will have to offer higher interest rates to sell bonds, increasing future deficits and putting solvency further out of reach. At some point not too long after that, the bond markets (and by that I mean China and Japan) will stop playing. Game over.

We have passed the fiscal event horizon. A singularity looms. Debt default, hyperinflation, or something equally traumatic is coming soon.

UPDATE: At Zero Hedge, economist Tyler Durden says: “In a word: the US collects enough money organically (via taxes) to cover less than a third of its outlays.”

257 thoughts on “Social Security and the fiscal event horizon

  1. Ten years ago, David Landes wrote a very insightful economic history, The Wealth and Poverty of Nations. In it, he relates the story of a Latin American graduate student’s complaint about the insistence of western lending institutions on austerity measures as a pre-condition to further loans.

    When Landes pointed out that a sovereign nation can always default, the student replied “Yes, but then who will lend us money?”

    There are no good solutions, other than cutting spending, which this administration ideologically opposes. But sooner rather than later that will be unavoidable, if only because nobody will pay for our spending. Personally, I expect the dinosaur media to do their best to bury this story until after the election in November, in fear of further inflaming the tea party crowd. If Zero Hedge is correct that the last raising of the debt limit won’t keep the wheels from coming off until after the election, then good luck with that.

  2. While the change from net social security inflow to net social security outflow is symbolically meaningful, the relevant changes have been affecting the US govt budget for a while.

    A few years ago, SSI could be relied on to produce a significant amount of money, say $50B, that the Treasury would borrow and the govt would spend. As long as that number was growing, things looked good. Let’s say that it topped out at $100B before it started dropping. When it dropped to $50B, the Treasury had to find >$50B somewhere else. (The number is greater than $100-50B because spending expectations didn’t change when the SSI tax derivative changed sign.) When it hit $25B, it had to find >$75B.

    The difference between the >$95B that it needed to find last year and the >$100B it needs to find this year is symbolic. The frog has been boiling for some time.

  3. > When Landes pointed out that a sovereign nation can always default, the student replied “Yes, but then who will lend us money?”

    Argentina has defaulted at least twice and still finds folks to loan it money.

    Two good things happen when govts default: (1) stupid people lose money and (2) smarter people stop loaning to govts. When the latter dominates the former, govts learn that they aren’t immune to economics.

  4. The bond markets may decide the US is no longer AAA, but where else can they go? And what happens if they have no place to go? It’s not like a person losing their credit rating – the US bond market is big enough to distort the entire world finanical system when it goes awry, and the feedback looks tricky. I don’t know what the failure mode is – inflation here? Deflation in China? – and I doubt anyone does. Any macroecon folks want to comment?

    As the old saying goes: If you owe the bank $1000 and can’t pay you have a problem; if you own the bank $1000000000 and can’t pay he has a problem.

  5. “If you owe a thousand dollars and can’t pay, you have a problem. If you owe a million dollars and can’t pay, the bank has a problem. If you owe a billion dollars and can’t pay, the government has a problem.” That’d be the traditional formulation.

    I’d add “if you owe twenty trillion dollars and can’t pay, the human race has a problem”.

    And we won’t even go into the $80T of unfunded liabilities (such as all those T-Bills sitting in the “Trust Fund” that government accountants pretend they can just cash in to fund Social Security and Medicare) that we don’t admit to. Although at least those can legally be made to simply go away if Congress ever grows a spine.

  6. >I’d add “if you owe twenty trillion dollars and can’t pay, the human race has a problem”.

    Yes. One of the serious questions is whether the coming crash in the U.S. government’s finances will take out the rest of the world economy financial system on the way down. It’s not impossible.

    If this seems like bizarre speculation…remember that the dollar is a fiat currency. And ask yourself what happens if people decide it’s worthless.

  7. It’s not just this administration that is ideologically opposed to cutting the spend rate. This problem has been brewing since Reagan decided to make the SS system not self funding anymore. It was great while the the extra influx could be turned into ‘special’ bonds, which allowed the Feds to spend the cash. It’s not so good now.

    The Social Security / Medicaid deficit could be substantially reduced by eliminating the current $90,000 cap (if you didn’t know already, once you hit a salary of $90k, you stop paying SS and Medicaid taxes). This still eaves the problems of looming total deficits and debts, of course. Entitlements and the military will have to be reduced substantially (the amount of discretionary spending, even if totally eliminated, would not make up the budget shortfall). This approach is politically unpalatable.

    If healthcare could be made more efficient, we could also free up a few percent of our GDP to use on other things. This would also then generate some more tax revenues.

    BTW, healthcare can be made more efficient. We spend well above the other industrialized nations as a % of GDP and our average care is no better. We do have a bifurcation in health care access, though. So it is difficult to get those of us who can get the great care to give up anything to help out those who don’t.

  8. >Entitlements and the military will have to be reduced substantially (the amount of discretionary spending, even if totally eliminated, would not make up the budget shortfall).

    Entitlements will have to end. Period. They’re unsustainable, because it is not just politically impossible to cut them, it is effectively impossible to resist pressures to raise them (see Some Iron Laws of Political Economics).

  9. meat.paste Says:
    > It’s not just this administration that is ideologically opposed to cutting the spend rate.

    See here is what normal organizations and people do when they are in debt trouble:
    1. Drastically cut their budget
    2. Sell off their assets
    3. Try to renegotiate terms with their creditors
    4. Cut up their credit cards
    5. Don’t take on any more obligations until you fixed the ones you have.

    That is what the feds need to do too.

    1. Stop spending money on non discretionary things. For example, bailouts and putative stimulus packages.
    2. Sell off the gazillions of dollars of assets that belong to the government. For example, mineral rights, hundreds of thousands of buildings, millions of square miles of land, the radio spectrum, airports, space ports, massive amounts of gold and other minerals and on and on.
    3. Renegotiate terms with their creditors. Bond holders are unlikely to comply, but we can certainly reduce our welfare and social security payments and all those massive pension plans and fat packages the unions have negotiated. We might even consider just unilaterally reducing the interest on our bonds, and take the hit to our credit. Our credit sucks, it is just that its suckiness is hidden behind a shaky, dangerous edifice of deceit and dissimulation.
    4. Do something to stop it happening again — a balanced budget amendment would help, a line item veto for the president and the option of line item voting for every congressman and senator
    5. Don’t start any big new entitlement programs. Can’t think of any examples of that off the top of my head, but you can fill in the blank.

    Simply speaking, one way to pay down our debts is to sell off government assets and give the money to the creditors. So our people on Social Security would not be screwed over, rather their pensions would be monetized and paid for. That would be a stimulus plan worth having. Imagine what releasing all those productive assets and capital into the economy would do.

    Of course, none of the above will actually happen, because it run contrary to everything politics stands for. However, it is the correct economic solution to the whole sticky mess.

  10. > UPDATE: At Zero Hedge, economist Tyler Durden says

    I find the phrase “economist Tyler Durden” amusing because 1) Tyler Durden is a fictional character (a terrorist) who 2) wouldn’t fit the stereotype of a carefully-calculating economist. See also: Fight Club

    Spoiler alert: Don’t read the plot summary in that link if you want to ever see the movie. It’s a good movie, although a bit overwhelming for some people (language, violence, sexuality — it earned its R-rating).

  11. > We spend well above the other industrialized nations as a % of GDP and our average care is no better.

    You’re not controlling for populations. (And, the relevant figure isn’t % of GDP, but absolute dollars. By that measure, we’re even worse because our GDP/population is significantly larger.)

    There are many life-style choices that increase health care costs but are largely immune to health care spending. (I’m thinking obesity, but there are others.)

    > BTW, healthcare can be made more efficient.

    Not by the US govt. See medicare, medicaid, and other us govt healthcare for a strong argument. They’re actually not any cheaper than private.

    If you disagree or claim that the US govt could do better, I’ll make you the same “put up or …” offer than I make everyone who disagrees.

    You get all of the money that is currently spent by every US govt (local, state and federal) on health care for anyone. Yes, employees too, not just medicare/aid, va, and ihs. Heck, I’ll even throw in the money and employees in companies that get >80% of their revenue from govt contracts. You get to do anything that you’d like to provide them health care – you can set up whatever payment scheme or contracts that you’d like (however, you don’t get to force doctors to take what you offer). You can change liability laws and/or can allow imported drugs (as long as private folks get to play by the same rules).

    If you run the numbers, you’ll see that I’m offering you >40% of the population and >40% of current health care spending and you get free rein to make whatever changes you like.

    The only hook is that your per-person budget gets cut 5%/year in years 3-6. That’s a total of just over 20%, which should be slam dunk considering the claims of 30% savings. And, I’ll even let you keep the money if you want to spend it covering additional people.

    At the end of year 6, we’ll evaluate. Unless, of course, the folks covered revolt first.

    Deal?

    And no, you don’t get to argue how well you’d do. You have to actually do it.

    BTW – If you say “profits”, I’ll point out that the total profit of all US health insurance companies is under $10B/year, which is less than 0.5% of healthcare spending. “Executive salaries” don’t change that number significantly.

  12. > The Social Security / Medicaid deficit could be substantially reduced by eliminating the current $90,000 cap (if you didn’t know already, once you hit a salary of $90k, you stop paying SS and Medicaid taxes).

    That’s somewhat correct. The cap is for SS only but all salary is subject to medicare. And the SS cap is over $100k.

    However, SS benefits are also capped. And, the closer you are to the cap, the less the return. SS for high-income folks subsidizes SS for low-income folks.

    Rich folks mostly ignore SS because of that cap. SS advocates used to think that that was a good thing.

    If you’re going to remove the cap on SS taxes, are you also going to remove the cap on SS payouts? If you don’t, rich folks will get a lot more interested (because you’ve just increased their taxes by 15%), and not in a way that you’d like. (That’s why SS advocates used to love the tax cap.) If you do remove the payout cap to keep the rich folks from killing SS, are you ready to let Ross Perot collect >$500k/year in SS?

  13. >[Healthcare cannot be made more efficient] by the US govt. See medicare, medicaid, and other us govt healthcare for a strong argument. They’re actually not any cheaper than private.

    Correct. One reason we spend more as % of GDP is that most of the world’s medical R&D gets done here, including clinical studies of effectiveness. There’s no way for government intervention to bend that cost, nor would it be a good idea if we could.

  14. @esr:

    Entitlements will have to end. Period. They’re unsustainable, because it is not just politically impossible to cut them, it is effectively impossible to resist pressures to raise them

    I’ve been saying the same thing since before Bill Clinton won his first election. It won’t happen. Powerful lobbies like AARP have ensured that the government will continue paying out Social Security benefits until the entire economic system collapses because no one wants to be seen as being against retirees.

  15. > Entitlements and the military will have to be reduced substantially (the amount of discretionary spending, even if totally eliminated, would not make up the budget shortfall).

    Eliminating military spending wouldn’t make a significant dent. Mentioning it is a strong indicator that you don’t know relevant facts.

  16. > We have passed the fiscal event horizon.

    What will an eventually-desperate U.S. gov’t do to cushion the economic crash?

    Intentionally cause dollar inflation? 50% inflation would be like only having to pay off half your debts, ignoring major side effects like all your citizen’s savings being wiped out. Events like that tend to hurt the economy that generates tax revenues in the first place.

    Eliminate whole departments? (Dept of the interior, etc.)

  17. >Eliminating military spending wouldn’t make a significant dent. Mentioning it is a strong indicator that you don’t know relevant facts.

    Not quite true. Defense (exclusive of VA) accounts for about 18% of total spending; that’s a significant dent. But it’s not where the future deficits are coming from and not the source of our problems.

  18. >techtech:

    The other problem with inflation is it only helps if you can balance your budget going forward without the debt; the yield on any new bond issue is going to be astronomical, or else they’ll demand it be denominated in foreign currency.

  19. It’s hard to see any way out of this that isn’t an extreme dislocation and very painful.

    We already can’t pay for the entitlements we have, the Obama administration wants to pile on a huge new one.

    We could cut entitlement spending and get rid of cabinet level departments, but we won’t because it is politically impossible. And just gutting all military spending would be completely insane.

    What good are entitlements if they eventually bankrupt your whole country? Greece and California are already there; the USA is on the same road.

    Can’t pay for it, can’t cut it either. Something somewhere will have to give.

  20. I consider hyperinflation to be vastly more probable than sovereign default. Sovereign defaults usually happen when a country’s debt is denominated in a currency other than its own. Virtually all US debt is denominated in dollars, so the US will just print as much money as it needs to in order to pay it off. A default would be an admission of defeat with immediate, impossible-to-hide, and cataclysmic consequences that would be guaranteed to get everyone who supported it booted out in the next election cycle. On the other hand, if the currency gets further debased, it can just be spun as yet another “stimulus”, and the resulting inflation can get blamed on hedge funds or something.

  21. >techtech:
    > Intentionally cause dollar inflation? 50% inflation would be like only having to pay off half your debts, ignoring > major side effects like all your citizen’s savings being wiped out. Events like that tend to hurt the economy
    > that generates tax revenues in the first place.

    Good point.

    Also remember that a lot of those entitlements are inflation indexed. So even massive intentional inflation doesn’t offer an escape.

    We’ve noted the impossibility of the current regime in cutting entitlements. But note that the regime of that great conservative GWB also gave us a large new entitlement and no cuts whatsoever.

    If we survive this mess, it will be in spite of Washington, not because of it. And election results are irrelevant.

  22. I agree with the premise of your post, though probably not the conclusion, but it’s intellectually dishonest to throw out that number about the bottom 50% only paying for 3% of revenues. As that Tax Foundation link and the quote in your update note, that’s only counting the third of revenues raised by income tax, the bottom 50% of taxpayers are still paying SS taxes and the like, that aren’t counted in that 3%. The real number paid by the bottom 50%, including SS and other taxes, is still far too small, but that’s no reason to exaggerate and lie just because the other side often does. As for the tendency to treat this debt as apocalyptic, the approximately $15 trillion in federal, state, and local debt is not insurmountable compared to the $54 trillion in US household net worth, that only continues to grow every decade. There will be a battle over which of us will have to pay more of that debt off but the SS and medicare-entitled will lose it as they’re outnumbered, plus they won’t care as much as we’ll be so much richer.

    As for inflation being a way out, that’s essentially a tax on those who lend money so that one of the biggest debtors around, the US govt, can weasel out of its debts. I don’t see why anyone who thinks tax hikes are politically infeasible would think such a peculiarly destructive and regressive tax hike of inflation is likely, particularly considering the independence of the Fed over the last 30 years, not to mention Mike’s point that it doesn’t screws you for all future borrowing anyway. We need spending cuts across the board, including the often completely wasteful defense spending, and I think we will see them.

  23. >Also remember that a lot of those entitlements are inflation indexed. So even massive intentional inflation doesn’t offer an escape.

    Yes. This is why I disagree with Daniel Franke. My bet is on a debt default.

  24. >it’s intellectually dishonest to throw out that number about the bottom 50% only paying for 3% of revenues.

    You’ve misunderstood my logic. If the bottom 50%’s share of tax revenues is over 3%, that makes the overall fiscal problem worse, not better, because it means the economic and political feasibility of squeezing out more revenue drops in proportion to the underestimate.

  25. So what do I as an individual do?

    It is all well and good to scream “OMYGOD the Market’s gonna crash”, but what should I do upon hearing that warning?

    I have been well paid for the last twenty years, and I might not need to work ever again, unless all of a sudden the currency becomes worthless.

    What steps can I take to prevent losing everything in a crash? Avoid debt? (check) Don’t piss it all away? (Check – I hold on to a dollar til the eagle screams)

    But I have significant assets in banks and brokerage houses, and I wonder if it will all just evaporate during a hyperinflation episode. I don’t want to put all of in in the mattress, but what would a prudent person do?

  26. As I understand history, neither the Soviets themselves nor the rest of the world’s intelligence agencies foresaw the sudden collapse of that government. Out of that chaos, enormous fortunes were made by opportunistic individuals and financial entities who took advantage of the desperate times and a pliable populous. One wonders if an extraordinary con is not now playing itself out here in the good ole USA.

    For example, the day after the financial house of cards comes falling down, the enormous engine of the US economy cannot actually grind to a sudden halt. Life will go on, but the illusion of stored monetary wealth will take a huge hit and everyday living will become much more stressful and burdensome. The fascinating speculation is centered not on financial unknowns and timing, but rather how we will re-build ourselves? Will we become more totalitarian or more libertarian? The answer may have more to do with ratio of net producers to net receivers rather than anything else I can think of.

  27. One more way for the US government to save money– end the war on drugs. Not only is it tremendously expensive in money, it means that people who could be doing useful work are in prison or enforcing those laws.

  28. So what do you guys see happening to people like myself. Dropout GED recipient, make like $12 an hour as a baker, no higher level or base level skills. Strong and adaptable but with no worth while qualifications.

    Subsistence farming is my thought on it. I could definitely live with that. Might even enjoy it.

    Just curious.

  29. Josh, have you ever met a subsistence farmer? Not many of those in the US, let alone farmers. I think you have a lot of opportunity to learn online and pick up skills that are necessary. Btw, some of the richest people on the planet never graduated school or college, so that’s neither here nor there. Online work and certification will take off, you will have a lot of opportunity to do graphic design or edit text/video or do online support. We have already invented and deployed the technology that will power the next boom; all that’s missing is the final piece, micropayments, to complete the monetization equation and ignite it. It will happen soon enough. :)

  30. The modern formulation would be:

    If you owe $1000, you have a problem.
    If you owe $1 million, the bank has a problem.
    If you owe $1 billion, the government has a problem.
    If you owe $1 trillion, somehow that’s OK.

  31. Ahhhh, but Nancy Leibovitz is a known drug addict who only wants to legalize drugs so that she can shoot up, snort up, and toke up all day long and avoid having to print up any more of those damned buttons.

    Or at least that’s the tar they’ll use to stick the feathers onto you.

    I try to engage ordinary people in conversation about it. When you have an opportunity to engage a random stranger in conversation, just say “Hey, if all drugs were legal, would you start getting stoned every day?” and when the answer is no, I say “Well, then let’s legalize them.”

  32. Speaking about drugs:

    I would legalize marijuana yesterday. It is a relatively benign substance, certainly less harmful than alcohol. Really quite a nice drug, as drugs go. I have grown (and smoked) quite a bit myself.

    But the harder drugs is where I draw the line. I hear libertarians say they would legalize everything, acid, crack, meth, painkillers. To me this is insane.

    Libertarians like to say that you can do whatever you want, as long as you are not harming others. But someone hooked on these hard drugs most certainly does have a negative impact on their friends and family.

    It is not about taxes and revenue. Rather the logic that obtains here is a moral judgment on the damage these drugs do to peoples lives. Our society must make it clear that abusing these drugs is unacceptable. That is more important than revenue from taxes on these substances.

  33. Darrencardinal,

    You do not have the moral right to tell me what I can and cannot do with my body. That applies to every other human being on the face of this earth. Period. End of story.

    Cordially,

    Inkstain

  34. >But someone hooked on these hard drugs most certainly does have a negative impact on their friends and family

    True. But the harm from drugs is exceeded by the harm from drug laws.

  35. >Nobody has yet mentioned that Social Security can be saved simply by slipping the retirement age.

    That largely postpones it. The government may try keep going by slipping the retirement age so the Baby Boomers retire later. The fact that there are less retires people at any one time is swamped by the general increase in the retired. Also this is going to be politically unpopular.

    @esr
    I agree that sovereign default is quite likely, but the government will at least try with hyperinflation. How much time do you think it will by them?

  36. >I agree that sovereign default is quite likely, but the government will at least try with hyperinflation. How much time do you think it will by them?

    Almost none. The second it looks like the Feds are going that route, the bond markets will close to them. The problem is that people remember the Weimar republic now; we know how that story ends.

  37. >But someone hooked on these hard drugs most certainly does have a negative impact on their friends and family

    So does being absent. Or having an affair. Or buying stuff you can’t afford. Or any other variant of being irresponsible.

    Laws regarding drugs, books, dancing, gambling, sex, hairstyle, beards, clothing, etc have no place in a free society.

    For those who prefer that all these things be strictly regulated, the Shari’a paradise of Iran awaits you.

  38. TomA

    Out of that chaos, enormous fortunes were made by opportunistic individuals and financial entities who took advantage of the desperate times and a pliable populous. One wonders if an extraordinary con is not now playing itself out here in the good ole USA.

    Of course it is, and it’s no big secret. Wall Street is enjoying bailouts, making record profits and paying record bonuses, while the country is in a severe recession. It doesn’t exactly take a crystal ball to see what’s going on. I’d only expect more of the same in the case of a total failure of the system.

    This is how financial collapses have always worked, but I’ve still been somewhat surprised over the past year how bald-faced the whole thing has been and how disparate the public reaction has been. Sure, you get Tea Parties and lots of angry people, but not really much of a coherent movement.

  39. > The problem is that people remember the Weimar republic now

    I wonder. The stock market bubble of the late 1990s happened 70 years after the bubble of the late 1920s. 70 years was just long enough for everyone who remembered 1929 to die. The death of my grandparents was not the cause of the dot-com bubble, but I do think the loss of that generation removed an impediment to it.

  40. > Paul:
    > What steps can I take to prevent losing everything in a crash? Avoid debt? … significant assets in banks … will all just evaporate during a hyperinflation episode … what would a prudent person do?

    Welll… Market crash and hyperinflation can be different scenarios.
    Not mutually exclusive, but you can have one without the other; though hyperinflation tends to produce a market crash eventually.

    If you are certain that hyperinflation is coming then the rational (though arguably not ethical) response would be:
    1) Liquidate all savings.
    2) Borrow as much as you can; at fixed rates.
    3) Borrow more. At fixed rates.
    4) Seriously, fixed rates: don’t screw that step up.
    5) Do not loan anything; that includes any savings accounts (= loan to bank), corporate or treasury bonds, etc.
    6) Put all your investment in assets of proven inherent value: gold, commodities etc (physical goods if possible).
    7) Better yet invest in productive assets of proven value. Rentable land, farmland probably better than housing/retail/office; mines; oil; physical infrastructure etc. Owning directly rather than via a corporation probably better still.
    8) Sit back and let hyperinflation write down your debts, while real assets hold value.
    9) Don’t come crying to me when this leaves you flat bust if hyperinflation doesn’t happen.

  41. Russell Nelson,

    I’ve been arguing for drug legalization for decades, and no one has made that accusation. Furthermore, I can avoid working on buttons by commenting to blogs.

    Actually, there’s been slow (very slow, shockingly slow) progress towards public acceptance of drug legalization.

    More generally, I find it’s more efficient and more informative to let people make asses of themselves if they’re going to rather than to announce that I know in advance that they’re going to say something stupid.

    My name is Lebovitz. Cut and paste is your friend.

    Darrencardinal,

    Putting people in prison for long sentences and having them get killed in random violence from drug gangs and the police is hard on families, too.

    I suggest using words and ostracism to indicate moral disapproval rather than violence.

    In any case, making drugs illegal does very little to keep people from using them.

    Back to the larger question: any general principles for what governments choose when they come to a bend or break moment?

    And a little hope: Another way out would be a huge improvement of productivity. Any chance of that, maybe by way of biotech or fabbing?

  42. JohnSF, this is exactly why I love HCP right now. Heavily leveraged? Check. Fixed-rate debts? Check. Productive assets? Check. Tenants with long-term leases that are tied to the CPI? Oh, hell yes.

  43. Hey, Russ Nelson,

    If all drugs were legal, would you get stoned occasionally?”

  44. @Russell Nelson:

    Nobody has yet mentioned that Social Security can be saved simply by slipping the retirement age.

    That’s already been done once, right? It used to be 65 and now it’s 67-1/2. I think that politically it’s far too late for that. The Boomers are hitting their 60s now. Just like the last time they slipped it, there’s going to have to some cutoff date at which people are grandfathered in. Except that most of the Boomers are already grandfathered in from the last one. How well do think it’s going to go over when they tell the Boomers they need to wait another 5 years?

    People view this a system that they “paid into” and it’s “their” money (which, it really is.) Telling them they won’t get their money or they won’t get it on-time (especially when many have financially planned around it) is not going to sit well.

  45. ESR: what should one read to get to a masterful grasp of the US economy and related subjects? I feel completely lost, and you seem to know your shit in this area.

  46. # Darrencardinal Says:
    > But the harder drugs is where I draw the line.
    > I hear libertarians say they would legalize
    > everything, acid, crack, meth, painkillers. To
    > me this is insane.

    What exactly do you think would happen? When drugs are legal (as many of them are) innovation changes the nature and effects of the drug. We don’t drink moonshine we drink Crown Royal. We don’t smoke hard unrefined tobacco, we smoke Virginia Slims. We don’t shoot up caffeine, we drink Folgers Breakfast Blend. We don’t buy our chewing tobacco from a scuzzball on the street, we buy it from Walmart.

    When drugs are legal they are generally moderated in effect, made safer and more reliable, and provided in a controlled, safe environment. Cocaine in the past, when it was legally available, was dangerous for sure, but MUCH less dangerous than it is now when it might be cut with rat poison for example.

    In our society, people who have serious problems with legal drugs have many great options to get help. It is far harder to do that with illegal drugs. When drugs are legal, parents can teach their children how to use such things responsibly when they are old enough, not make blanket, ineffective bans.

    Additionally, although it is not popular to say, the simple fact is that some illegal drugs are actually beneficial in some respects. Marijuana helps people relax, and is an effective stress reducer. (It also has some well known medicinal benefits, but lets leave that aside.) LSD is very effective at opening the mind to a different perspective and way of thinking. Cocaine helps people have a really good time, Ecstasy gives people the energy to party and enjoy their lives. Of course some of these effects are dangerous if not used in a controlled environment, but the illegality greatly magnifies this danger.

    What sort of puritanical strain of thought would throw these sorts of benefits on the trash pile for no apparent payback? Honestly, aside from the well known racist origins of drug laws, and the absolute nonsense propaganda put out by modern day temperance campaigners, I really don’t understand why people hold such an opinion.

    So, to put it another way, when drugs fall under the rule of law, society has much better control over them and their effects. People who drive high or drunk should be subject to severe penalties. People who giggle in the basement should not.

    None of this even begins to address the dreadful toll on society that the drug war itself takes, but that is perhaps most brutal of all. If you are in doubt, check out what happens when someone actually aggressively tries to enforce the law as they are doing in Mexico. And we don’t need to guess what would happen were drugs suddenly legalized. We have a clear historical precedent. In 1931 the ban on the sale and manufacturing of alcohol was ended. The result? All the massive gang violence and ill effects of that drug war quickly faded away, and granny could finally enjoy her glass of Chianti with her pasta again. That seems like a pretty good exchange to me.

    Finally, let me just point out that most of these benefits accrue only when drugs are actually legalized. Decriminalizing drugs is an act of moral cowardice. It helps address a few minor problems, but doesn’t get at the root of the problem. Legalization, so that legitimate companies make these drugs, and so that the rule of law applies, is necessary to release us from the terrible consequences of the law on drugs.

    Nancy, when you have a moment, could you send me one of those buttons?

  47. I’m not ESR, but I’ll say I’ve been reading Basic Economics by Thomas Sowell, which seems to be quite good.

    Honestly, he’s die-hard capitalist, without the Ayn Rand aura. It would be interesting to read someone with his writing skill present collectivist arguments, just to see what they would look like. I look high and low for such things, and while I know nice people who are collectivist, their arguments are largely appeals to compassion and/or lumping capitalists with social conservatives followed by an attack on lack of intellect. Yeah, I know, I sound like a concern troll. Seriously, I’d like to see arguments. Should I just try reading Krugman or something?

  48. U.S. politicians must be aware of what is coming. We can expect them to profit from the upheaval. My hope is that we here can also profit. And I’d like to see our country become more libertarian, too, but that’s probably wishful thinking.

  49. This blogpost and comment thread demonstrate that there is genuine anxiety about the near-term future and a companion desire to prepare for a worst case scenario in the hope of weathering the coming storm without too much hardship or injury.

    I would suggest the following. Try as best you can to anticipate what goods or services will be in short supply in the aftermath of a serious economic collapse (history is a helpful guide). Then pick out one of these and put yourself in a position to produce it. In your spare time, acquire the knowledge, skills, equipment, and resources necessary to provide this good or service. Don’t waste time worrying about whether you have made the perfect choice. In times of chaos, everything is fluid and evolving. The key is to be hard-working, productive, and flexible.

    We are where are today because too many of us have become lazy, addicted to an entitlement-based free ride, and have been insulated from the normal hardships that motivate people to get up off their ass and go to work.

  50. @Paul Brinkley:

    Have you tried Noam Chomsky? I don’t agree with anything he has to say politically, and ESR positively hates him, but being a linguist, he does seem to know a thing or two about writing. :)

  51. Eliminating the drug war doesn’t really save us that much money. The war on drugs is part of the Office of National Drug Control Policy, which has a proposed 2011 budget of 15.5 billion USD [1].

    The proposed 2011 budget [2] wants to spend 895 billion on security, which should be mostly the DoD, and 1.221 trillion on social security and Medicare combined. This is 2.115 trillion of a 3.834 trillion dollar budget. So, approximately 55% of the federal budget is spent on these three things.

    It is not fair to blame the massive deficit spending solely on Obama and the democrats. This has been a problem for over 30 years and there is plenty of blame to go to politicians of all parties. The root cause is people like to get services but they don’t like to pay for it. It is human nature to forget about TANSTAAFL.

    @Andy Freeman – I would argue that %of GDP is a better number because it reveals how much of our production capacity is being consumed by healthcare. However, you are correct that expressing it in terms of absolute dollars per person makes the US healthcare system seem even more expensive. In 2006, the US spent 15.3% of GDP on health care [3]. This works out to be about $7350 per capita (The GDP data is from 2007, but it should be close to 2006) [4]. Using the EU figures of per capita GDP ($33,900 USD in 2007) and estimating a 9% of GDP spend on healthcare from [3], it is about $3050. The US spends more than twice as much and our average healthcare is NOT twice as good (I’m using the infant mortality rates as a proxy – The US was 0.0622% and the EU was 0.0572% [5]).

    Also, as esr correctly pointed out, the DoD does consume a significant portion of the US budget. So I do know the relevant facts, thankyouverymuch. I did not realize the the Medicaid portion of the taxes did not have a cap, nor did I know the cap was north of $100k now (I just did a quick search for the information and I guess it was old). Thanks for the updated information. You asserted that Medicare and Medicaid were not cheaper than private insurance. Can you please provide a source for your statement?

    @esr – You state that the reason the US healthcare is so expensive is because we do most of the worlds medical R&D. How much of the R&D does the public subsidize? I assumed that the substantial portion of the R&D expenses were borne by the companies conducting the research.

    [1]http://www.whitehousedrugpolicy.gov/news/press10/020110.html
    [2]http://www.gpoaccess.gov/usbudget/fy11/pdf/summary.pdf
    [3]http://en.wikipedia.org/wiki/File:International_Comparison_-_Healthcare_spending_as_%25_GDP.png (I know, it’s wikipedia, but the reference material is not.)
    [4]https://www.cia.gov/library/publications/the-world-factbook/geos/us.html
    [5]https://www.cia.gov/library/publications/the-world-factbook/rankorder/2091rank.html

  52. Taking bets now on whether the Republicans will successfully pin blame for the entitlements crash on the Democrats. Although I fully blame both major parties for the mess we are in.

  53. Ah, yes. Social Security reminds me of myself and the United Thank Offering. The Episcopal church had (may still have) a program which handed out blue cardboard boxes with coin slots in the top. The theory was, that one should put a coin into the box whenever one felt thankful, and once a year bring the box and contents to church to be used for good works.

    Well, when I was doing that, I was pretty poor, and would often rob the box and put an IOU to myself in there. I quit bothering with it when I noticed the box held only IOUs and not money.

  54. Try as best you can to anticipate what goods or services will be in short supply in the aftermath of a serious economic collapse (history is a helpful guide).

    Save a bunch of luxury health and beauty care items. Like canned shaving cream, disposable razors — people will dying for this stuff and will pay a pretty penny.

    Learn how to build and fix things with only hand tools. Carpentry is a good skill as is mechanical accumen. Be a MacGuyver. (No, really).

    Solar power: buy solar powered items now. Learn how to scavenge things like solar cells and get some basic electronics knowledge. Having a passively-powered or solar-powered multimeter is a good idea.

  55. # Justthisguy Says:
    > Well, when I was doing that, I was pretty poor, and would often rob the box

    God is so going to punish you.

  56. Josh, if the fit truly hits the shan, a baker is going to be far more valuable than any Harvard MBA ;)

    I hope you live near me….we can trade.

  57. > Can you please provide a source for your statement?

    I can but I won’t because you made data dependent arguments without knowing the data.

    Here’s today’s question – what fraction of “poor people who can’t afford health insurance” are actually eligible for Medicaid. (In other words, the only reason that they don’t “have” health insurance is that they haven’t signed up, and as soon as they need it, they can have it.)

    Today’s fact – having health insurance does not reduce emergency room utilization – http://www.rwjf.org/files/research/072109policysynthesis17.emergencyutilization.pdf and http://www.rwjf.org/files/research/48929.pdf .

    The likely result of “govt healthcare” (longer lines for ordinary appointments – see the DMV) is more emergency room visits…. (MA’s govt healthcare hasn’t hit this point yet because they’re still trying to increase spending but the writing is on the wall.)

  58. > that’s only counting the third of revenues raised by income tax, the bottom 50% of taxpayers are still paying SS taxes and the like, that aren’t counted in that 3%.

    SS isn’t counted, and shouldn’t be, because it’s essentially a forced loan, one for which the poor get okay returns.

  59. > US spends more than twice as much and our average healthcare is NOT twice as good (I’m using the infant mortality rates as a proxy – The US was 0.0622% and the EU was 0.0572% [5]).

    There are documented differences in the way that infant mortality is counted.

    However, as I pointed out, the big problem is that you’re ignoring population differences. I’ll repeat myself. There are many life-style choices that increase health care costs but are largely immune to health care spending. (I’m thinking obesity, but there are others.)

  60. > Taking bets now on whether the Republicans will successfully pin blame for the entitlements crash on the Democrats. Although I fully blame both major parties for the mess we are in.

    Why equal blame? For the most part, Repubs resisted. The worst that they did was cheaper versions. (W’s prescription drug program is an example of the latter. As horrible as it was, it was far cheaper than what the dems wanted. Remember that when a Dem says that she opposed that program.)

    Yes, the Repubs lost those battles and were largely incompetent in resisting them, but that’s very different than pushing them.

  61. I’m still waiting for meat.paste to address the details of his proposal to remove the cap on SS taxes.

    I’ll repeat my questions: If you’re going to remove the cap on SS taxes, are you also going to remove the cap on SS payouts? If you don’t, rich folks will get a lot more interested (because you’ve just increased their taxes by 15%), and not in a way that you’d like. (That’s why SS advocates used to love the tax cap.) If you do remove the payout cap to keep the rich folks from killing SS, are you ready to let Ross Perot collect >$500k/year in SS?

    Am I wrong in thinking that meat.paste intends his/her proposals seriously?

  62. >I assumed that the substantial portion of the R&D expenses were borne by the companies conducting the research.

    Companies never bear costs. They get incorporated into the the prices their customers pay. How could it possibly be otherwise?

  63. Andy Freeman Says:
    > Why equal blame? For the most part, Repubs resisted.

    The Republicans resisted because they wanted those tax dollars for their own pork-barrel projects. They get equal blame for the general problem of big federal government, although maybe less blame for the Social Security mess.

  64. All that said, if you can deal with inflation-indexing (COLAs), tweak benefit elgigibilty a bit, and get a slightly higher growth rate than current projections, the problem suddenly isn’t nearly so bad. Doomsayers have predicted 48 of the last 7 economic crashes. But have the tax-eaters reached a critical mass to block any changes? Will that change when the outcome of this scenario elsewhere is seen?

  65. >All that said, if you can deal with inflation-indexing (COLAs), tweak benefit elgigibilty a bit, and get a slightly higher growth rate than current projections, the problem suddenly isn’t nearly so bad.

    Federal revenues would have to triple to cover requirementts, and that assumes Obamacare doesn’t make the spending problem worse. Yes, the problem is that bad.

  66. >I assumed that the substantial portion of the R&D expenses were borne by the companies conducting the research.

    They do, but because of foreign gov’t limits on what drug companies can charge, most revenue (I recently saw a claim of 85%) comes from American sources – which is what funds the R&D.

  67. They do, but because of foreign gov’t limits on what drug companies can charge, most revenue (I recently saw a claim of 85%) comes from American sources – which is what funds the R&D.

    Exactly. The American consumers pay higher costs on drugs than citizens in most foreign countries. That’s why some drugs cost as much as $300 (or more!) for a 30 day supply in the U.S., while the same drug can be obtained at a much lower cost elsewhere in the world.

  68. >Federal revenues would have to triple to cover requirementts, and that assumes Obamacare doesn’t make the spending problem worse.
    >Yes, the problem is that bad.

    Well, not quite. If I’m reading the reference right, you’ld have to triple the income tax rates on high earners from 2007 to balance the 2009 budget; but the incomes in the top percentiles tend to be the most variable, so I’m not sure those numbers are an appropriate baseline. (Which is a huge problem for the high debt states – they’re dependant on income tax, which swings way down in recession, while spending climbs, and yet they can’t borrow…).

    I don’t have citation handy… will try to look later. I agree it might be that bad if the current economic slump continues indefinitely, and that it seems at times as though current US leadership is determined to achieve that.

  69. I think it is worth pointing out what is at the core problem with SS and Medicare. Our government would like to tell us that it is due to changing demographics and adjustments of interest. It is not. The fundamental problem is that the government collected (forcably) insurance premiums, and then spent them rather than saving them. If I had my employer deposit a portion of my salary in my 401k, and then I borrowed extensively against the 401k throughout my life, would I be surprised when, come retirement, I had nothing left? Of course not, but that is about as close a model to social security as can be given, for it is precisely how social security works.

    So the simple answer is that we have to try to recover some of the money that was borrowed. Unfortunately the opportunity for compounding is gone, and much of it has been spent on Chinese takeaway, vacations to Florida and that cute outfit you wore to the high school reunion that doesn’t fit quite so well anymore.

    However, there are considerable hard assets that it has been used to purchase. Any reasonable person in this situation would sell the hard assets to try to recover some of the capital. You might love ANWR, but it is a hard asset bought with US taxpayers’ dollars. It is undoubtedly worth a lot of money, so sell it, and give the money back to the people you stole it from in the first place. If limo liberals want to control ANWR, they can even be the people who buy it, and protect it forever. That seems like a good deal to me for everyone involved. (And when we get rich as a nation again, if you really want to, you can always buy it back.)

    However it won’t happen. California is in dire straits, so the Governor proposed selling off San Quentin, a prison on some of the most prime real estate in the Bay Area, right on the west of the bay with beautiful views of the bay, and the city and easy access to the freeway system and the surrounding countryside. Seismically sound. Apparently the land is worth something like $2 billion. Arnold could have placed the prisoners in other prisons apparently. But no, such a sensible strategy apparently isn’t possible. God forbid we take away the pleasant seascape views from the murderers and rapists. Public outrage followed even the suggestion, and Arnold had to back down from one of the few sensible ideas he has had recently. (Heck forget San Quentin, why not sell Alcatraz? They don’t even have any prisoners there! Build some real nice condos and a harbor, maybe a bridge to the mainland, it would be worth a freaking fortune.)

    Of course, a lot more than ANWR, San Quentin and Alcatraz will have to go on the auctioneers’ block, but it would be a start in the right direction.

    However, the problem is not the politicians, it is the people. Even if Obama wanted to fix the Medicare or SS problem, he could not. The dirty little secret of the Tea Party movement is that they are not anti government at all. One of their passionate rallying points is maintaining these large entitlement programs for seniors. Of course, it is complicated, because the seniors have essentially been duped into putting their money into a pocket with holes. But ultimately it is the people who demand maintenance of the entitlements, and politicians are doing their bidding.

    In Greece, the people are NOT rioting to throw out the government, and demand fiscal responsibility, they are rioting to demand no cuts, and increased wages. Go figure. How ironic is it that Germany the archetype of hyperinflation now finds itself bailing out their European buddies.

    Don’t blame the political parties. Blame the matrix of the parties: the people.

  70. >>I agree that sovereign default is quite likely, but the government will at least try with hyperinflation. How much time do you think it will by them?

    >Almost none. The second it looks like the Feds are going that route, the bond markets will close to them. The problem is that people remember the Weimar republic now; we know how that story ends.

    Possibly, but (according to a recent edition of The Economist) investors still flee to US bonds, not from them. Until this effect goes away, the govt will be able to continue the inflation. When investors lose faith (proper irrational faith) in US bonds, they will bolt fast.

  71. Jessica Boxer Says:
    > However, the problem is not the politicians, it is the people.

    I saw somebody quote French Philosopher Alexis DeTourqueville as saying “Democracy will last until the people realize they can vote themselves the treasury.” That is the hole “we the people” have dug.

  72. http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=03&year=2010&base_name=pension_fund_cashes_in_treasur

    Interesting – Dean Baker is a very esteemed – and relatively non-Progressive – economist, yet he finds nothing unsustainable about this. There are historical examples of nations running much more debt as a fraction of GDP than we do.

    We are not Greece. World GDP compounds at about 4.7% annually ( at trend, which we’re below right now ) leading to a doubling of world GDP every 15 years. If that stops, our sovereign debt risk is the least of our problems. If it doesn’t the actual footprint of our debt is half what it really sounds like.

    And right now, Krugman is saying that the arrow points the other way – that any debt problem is *caused* by low levels of economic growth. Since we’re in deflation right now (or have been recently) this is much more of a concern than debt.

    Don’t believe me? Look at what happened with Britain and USA sovereign debt during and after WWII. The mix of pseudo-socialist and capitalist engines we have sure *seems* sustainable. Besides, we don’t have to outrun the bear – we just have to outrun Europe…. Social Security has had 80+ years to fail, and it just hasn’t.

    No offense, Eric, but I’d take Dean Baker’s word over that AP wire mess.

  73. Don’t blame the political parties. Blame the matrix of the parties: the people.

    Indeed. You get the government (and political parties) you deserve, to a large extent anyways.

    Having said that, I actually do support the honoring of SS/Medicare/Medicaid entitlements, in much the same way that the pre-revolutionary debt was honored by the Founders. They could have walked away, claiming “it isn’t our debt” but they saw the long-term wisdom of acting honorably.

    Same with today’s welfare debt. Grandfather everyone 40 or older, take no new people on board, and pay it off in phases over the next 20 – 50 years.

    Then carve the lesson in stone that “leftism is suicide”.

  74. @esr – I understand the companies pass along their costs. It must be so in capitalism. I didn’t think about the portion of the cost that is foisted off on the US because the other governments of the world negotiate better prices / refuse to pay more. Still, it’s a pretty steep premium we pay to keep the world stocked with the latest drugs and technologies. I guess it is somewhat fair since we consume the world’s cash to finance our spending

    @Andy Freeman – Where to start? I know! I’ll start at the end!

    1) Removing the cap on social security taxes without increasing the limits on payout would certainly go a long way towards fixing the current shortfall. It would not be fair (what tax system is?) and would have consequences, of course. Raising the retirement age can also eliminate the problem (the extreme case of making the retirement age 200 years old would reduce the payouts to 0). Do you have some ideas on how to fix the problem?

    2) Ronald Reagen started the era of large deficit spending (in terms of dollars). This has continued under every president since then. Even under Clinton’s largest budget surplus, the debt increased by $25 billion USD. The president proposed the budget. Congress amends it. There are some circumstances where deficit spending is proper in Keynesian economics. As a government though, we never follow through with the portion of the cycle where the surpluses are used to pay off the debt. See techtech’s comment above on why the problem is not easily fixable. This is a problem of both political parties.

    3) There may be differences in the way the infant mortality rates are calculated. The CIA factbook usually does a good job on equalizing the numbers so they can be used for these sorts of comparisons. There are probably better proxies for general health other than infant mortality, but the number was easy to obtain. How much difference does your corrected method of finding infant mortality rates make in comparison to the factbook numbers? You are correct that obesity is a (pardon the pun) huge problem on our healthcare system. If we really wanted to bend the cost curve in the coming decades, this is a very cost-efficient way of doing so. I could provide references for this statement, but I won’t :)

    5) I skimmed the articles you referenced. It was interesting that the emergency department (ED) usage increased as the number of insured went up. The articles also talked about a number of policy implications. Some of the implications were to do a better job with the non-ED follow up care for chronic illnesses and to incentivize hospitals to open up more beds.

  75. @JessicaBoxer:

    However, the problem is not the politicians, it is the people. Even if Obama wanted to fix the Medicare or SS problem, he could not. The dirty little secret of the Tea Party movement is that they are not anti government at all. One of their passionate rallying points is maintaining these large entitlement programs for seniors. Of course, it is complicated, because the seniors have essentially been duped into putting their money into a pocket with holes. But ultimately it is the people who demand maintenance of the entitlements, and politicians are doing their bidding.

    That’s what I said already, just not quite as eloquently as you. As techtech points out with his Democracy in America quote (fascinating book, but very, very dry reading), the reason we have such a democracy tainted by socialist strains is that the people demanded it. Overwhelmingly. And they still do.

    Even so, Jessica, knowing this fixes nothing. Complaining that system was broken by the people or the politicians or Martians with sonic stunners isn’t going to change the fact that it’s broken and about to seriously fail. The question isn’t who broke it, only who’s going to fix it and how? Or maybe the question is even can it be fixed? I see only two potential paths: only one of them leads to freedom. The other leads to the U.S. (and perhaps much of the West) falling under some kind of totalitarian regime.

  76. > > Why equal blame? For the most part, Repubs resisted.

    > The Republicans resisted because they wanted those tax dollars for their own pork-barrel projects.

    Oh really? Please name three of these pork barrel projects whose likely cost approached $1T. Yes, that’s a low bar – SS is well in excess of that.

  77. > I didn’t think about the portion of the cost that is foisted off on the US because the other governments of the world negotiate better prices / refuse to pay more. Still, it’s a pretty steep premium we pay to keep the world stocked with the latest drugs and technologies.

    You misunderstand. We don’t do it for them. We do it for us.

    We’re not in a position to force them to pay. Given that, what should we do?

    Do you really think that we should forgo life-saving drugs because someone else won’t help (enough) to develop them?

  78. > You are correct that obesity is a (pardon the pun) huge problem on our healthcare system. If we really wanted to bend the cost curve in the coming decades, this is a very cost-efficient way of doing so.

    Oh really? How do you propose to address obesity with healthcare spending? (Note that no one claims to.)

  79. morgan greywolf Says:
    > Even so, Jessica, knowing this fixes nothing.

    You are mistaken. Knowing the cause of a problem is the first step toward fixing it. If there is anything that can be done right now it is to make the source of the problem as widely known as possible. Perhaps then there might be some opportunity to fix it. If there is some great cataclysmic crash, then this knowledge will serve as an alternative to the natural totalitarian tendencies of the government than remains. In Germany after the crash they got Hitler. In New Zealand they got economic liberation. Both outcomes are possible. The difference is the knowledge base of the people who remain.

  80. > 1) Removing the cap on social security taxes without increasing the limits on payout would certainly go a long way towards fixing the current shortfall. It would not be fair (what tax system is?) and would have consequences, of course.

    I didn’t mention “fair”. I said that SS advocates used to believe that uncapped taxes would politically doom SS. (The cause of death depends on whether payouts were also uncapped.) Were they wrong?

    I’m inferring from “fix the current shortfall” that you don’t want to doom SS.

    > Do you have some ideas on how to fix the problem?

    I don’t think that it’s fixable and that trying to delay the inevitable in this case will the same effect it almost always has – it will significantly increase the cost (counting both the cost of propping it up and the increased cost of the crash due to said “propping”) and only marginally delay said inevitable. (Significant cost is okay if it buys “enough” time.)

    If you think that it is fixable, it’s up to you to come up with a fix. You don’t get to complain that someone else won’t.

  81. I’ve always wondered if the most politically expedient way to get the desired results would be to remove inflation indexing for benefits and budgetary items. This would automatically shrink the budgets in the event of any inflation (denominated in real dollars), thus reducing inflationary pressure. And, furthermore, it would ensure that interest groups such as seniors would have an incentive to encourage inflation to be kept at a minimum. After all, it’s a lot easier to vote for keeping the same budget (in nominal dollars) than to “cut” the budget from a scheduled increase.

  82. Can the U.S. play debt games like this, but in reverse?

    Is China broke?

    My (weak) understanding is that China lent money, then realized it would never be paid back, so rather than collapse, they pretended the loans were still sound and sold them off at full price to state-owned companies created to “take the fall”. But rather than fail, those flimsy entities have managed to attract outside investment, keeping them afloat while they figure out what to do with the bad, old loans. Meanwhile, China’s official credit rating is untarnished.

    Or can Congress simply vote to cover their ears and say LA LA LA LA LA?

    Pop quiz, hotshot politician. The treasury is broke, the economy is soft, you already owe massive debts to foreigners, so much so that you can’t borrow any more, and your voters are demanding you send them bigger and bigger monthly welfare payments.

    Your positively brilliant ideas are:
    A) Pass a law cutting the welfare payments to your own voters.
    B) Pass a law postponing interest payments on the foreign debts until after the next election.

    What do you DO?

  83. Andy Freeman Says:
    > We’re not in a position to force them to pay. Given that, what should we do?

    That isn’t entirely true. Different drug prices in different countries are supported only by governmental restrictions on the free flow of goods. Witness Canadian drugs, if the Feds would remove the barriers to Americans reimporting drugs then the price between the two countries would equalize, and the Canadian health system would have to adapt. (Or else they would have to do without the drugs.)

    Drug prices are a classic example of price discrimination, with artificial discriminatory walls. Here is how it works: the marginal cost of producing a drug is small, this means that the drug companies can sell drugs at a wide range of prices and still make a marginal profit (ignoring sunk costs, which are after all sunk.) They have to maximize their profit, so if there is a market where they can sell Paxil at $100, and a separate market where they can sell it at $10, then they will sell into both markets assuming the second doesn’t cannibalize the first.

    Canada says that it is illegal to sell Paxil for more than $10, the USA says charge whatever you like. The manufacturer can sell into Canada at either $10, or not sell there at all, so they choose the former, and shift more of the investment payback to the US market. If however, Americans can buy Paxil for $11 including a dollar for shipping from Canada, then the $100 market will be severely compromised. This means either Paxil forces up the price in Canada, or simply stops selling in Canada so that their fat profits in the USA don’t get eaten up.

    This is called price discrimination, where some sort of barrier divides the market up in an enforceable way, and prices can be set separately and optimally in the different markets. It is also why it costs less to buy a plane ticket with a Saturday stay over — stick it to those less price conscious business travelers.

    Why not just control prices in the USA? Because price controls always leads to shortages, in this case of new innovation. The USA has erected import barriers on drugs, and their net result is to support the Canadian health care system. I think that is pretty nice of us, but those damn Canadians still felt it was OK to beat us at hockey — ungrateful sons of guns.

    Of course the other big barrier to price pressure on drugs is the patent system, but I have already raged on about that recently, so I will get off my high horse.

    So we do have some control over the prices other countries pay. Of course there are certain bilateral issues there, but then there is always smuggling.

  84. > You are correct that obesity is a (pardon the pun) huge problem on our healthcare system.

    Obesity is only one of the relevant population differences. I’ve hinted at some of the others. (My medicaid comment is relevant here, as is end of life.)

    If you’re going to compare, you have to address comparable.

    Oh, and I note that you didn’t take my deal to let you run >40% of US healthcare.

    Interesting fact – Japanese-Americans have a lower homicide and suicide rate than Japanese in Japan.

  85. > Oh really? Please name three of these pork barrel projects whose likely cost approached $1T.

    Although I’m sure there have numerous been Republican-sponsored spending programs in the past 50 years that approached or exceeded one trillion dollars in inflation-adjusted dollars, I won’t bother to look them up just yet. If I do look I’ll start searching under Reagan-Bush-Bush deficit spending.

    Instead, I’ll ask you to please think about how many times the Republicans have been in control of Congress since FDR started the Great Bankrupt Society. How many laws did they pass cutting entitlements?

  86. It’s getting exciting now, two and one-half. Think of everything we’ve accomplished, man. Out these windows, we will view the collapse of financial history. One step closer to economic equilibrium. — Tyler Durden.

    Only after disaster can we be resurrected. – Tyler Durden

    Warning: If you are reading this then this warning is for you. Every word you read of this useless fine print is another second off your life. Don’t you have other things to do? Is your life so empty that you honestly can’t think of a better way to spend these moments? Or are you so impressed with authority that you give respect and credence to all that claim it? Do you read everything you’re supposed to read? Do you think every thing you’re supposed to think? Buy what you’re told to want? Get out of your apartment. Meet a member of the opposite sex. Stop the excessive shopping and masturbation. Quit your job. Start a fight. Prove you’re alive. If you don’t claim your humanity you will become a statistic. You have been warned.- Tyler.

  87. Oh really? How do you propose to address obesity with healthcare spending? (Note that no one claims to.)

    Easy.

    1. Federal government takes over all healthcare.
    2. Federal government decrees that obese people will have their healthcare cut off if they don’t lose weight.

    It will come to that.

  88. IIf there is anything that can be done right now it is to make the source of the problem as widely known as possible.

    How? You start saying things like “paying out entitlements like Social Security will cause an economic crash” and you’ve already got at least half the population no longer listening to you. Most the rest of the other half also won’t listen to you when you tell them they’re at fault, too.

    I agree that knowledge of what happened will help following a cataclysmic crash, but I don’t think we’ll avoid the crash.

  89. > 1. Federal government takes over all healthcare.
    2. Federal government decrees that obese people will have their healthcare cut off if they don’t lose weight.

    3. Obese people don’t lose weight.
    4. They get sick and lack healthcare.
    5. Massive political pressure forces another “bailout”.
    6. Congress briefly considers disincentives.
    7. GOTO 3

  90. > I don’t know what the failure mode is – inflation here? Deflation in China? – and I doubt anyone does. Any macroecon folks want to comment?

    Well, at the very least – no more cheap Chinese consumer goods as the balance of payments sharply equalizes. That means no more $2 wallclocks and no more Walmart, but more importantly a deterioration in Sino-US relations as trade volumes drop precipitously.

  91. Les, Dean Baker is a “relatively non-Progressive” economist? Haha, next you’ll say Krugman is solidly in the economic mainstream, not a rabid partisan who will repeatedly contradict himself to further “progressive” causes. Similarly, Dean Baker is the epitome of a “Progressive” economist, someone who will repeatedly flout economic principles in order to try and defend idiotic public policy. Social Security today bears no resemblance to SS even 40 years ago, let alone 80 years ago. That’s like saying cars from Toyota can’t fail today because they were reliable 20 years ago: today’s cars are very different from those cars. Hilarious that you will take Dean Baker’s “word” over an AP article that actually has facts and figures, particularly when Baker comes up with idiotic justifications like SS spending is actually a “stimulus,” completely ignoring the issue of how that spending will be financed that he’s nominally supposed to be answering.

  92. > I won’t bother to look them up just yet.

    In other words, you’ve got nothing….

    > Instead, I’ll ask you to please think about how many times the Republicans have been in control of Congress since FDR started the Great Bankrupt Society.

    Repubs had control of the house in 46-48, 54-56, and 96-2006, so the answer is “not much”.

    I note that you’re also forgetting Johnson’s expansion.

    > How many laws did they pass cutting entitlements?

    Welfare reform under Clinton was something.

    Note that failing to repeal is a lesser sin than pushing them through. It’s like the difference between manslaughter and murder.

    Remember – your claim is “equal blame”. Dems pushed entitlements, Repubs ineffectively resisted them and didn’t repeal them. That’s not equal.

  93. > Witness Canadian drugs, if the Feds would remove the barriers to Americans reimporting drugs then the price between the two countries would equalize, and the Canadian health system would have to adapt. (Or else they would have to do without the drugs.)

    Not so fast.

    The equilibrium price could be such that US companies can’t afford development.

    You’re also forgetting “patent busting”. Canada is under no obligation to honor US patents within its borders, so they can free-ride without Merck’s cooperation. If they do, the US gets to choose between allowing “generic” imports, which guts Merck’s margins, or trying to maintain the price barrier. Either way, Merck gets nothing from Canada.

    The US could respond with “confidential drug patents”, but chemical analysis is probably good enough to get around that.

  94. Jessica Boxer Says:
    > 5. Don’t start any big new entitlement programs.
    > Can’t think of any examples of that off the top of my head, but you can fill in the blank.

    And that’s why you’re not a politician :)

  95. @Les Cargill
    “And right now, Krugman is saying that the arrow points the other way – that any debt problem is *caused* by low levels of economic growth. ”

    Les, if Krugman is saying that, then you can pretty much take it as fact that the opposite is true. Krugman is *not* an economist; he is a DNC political operative. Nothing less, nothing more. His Nobel is a bigger joke even than Obama’s.

    You might want to spend some time here: http://krugman-in-wonderland.blogspot.com/

  96. # DVK Says:
    > And that’s why you’re not a politician :)

    Well given my recent adventures here where I have been called a nannyist, a fascist and a nazi, that is the nicest thing anyone has said to me for a while.

  97. # Andy Freeman Says:
    > The equilibrium price could be such that US companies can’t afford development.

    Obviously that is true. However, price discrimination allows different equilibrium prices in different market segments. This allows a larger overall revenue.

    > You’re also forgetting “patent busting”. Canada is
    > under no obligation to honor US patents within its
    > borders,

    Most drug companies get patents worldwide.

    > so they can free-ride without Merck’s cooperation.

    If only that were true. Perhaps you are not aware but I am not a fan of patents. If you were not aware patents have anti innovative effects, not just innovative effects. Recently the GAO published a study that indicated that patents in fact decrease innovation in the drug industry. Which is to say without patents we would be a larger and richer set of drugs available to us, and price pressures would drive them down too. So the patent argument is not particularly compelling to me.

  98. Jessica:

    That isn’t entirely true. Different drug prices in different countries are supported only by governmental restrictions on the free flow of goods. Witness Canadian drugs, if the Feds would remove the barriers to Americans reimporting drugs then the price between the two countries would equalize, and the Canadian health system would have to adapt. (Or else they would have to do without the drugs.)

    Until Canada passes a law carving out pharmaceuticals from patent protection, or does some equally crazy shit like making it legal for the Canadian Government to produce “necessary drugs that cannot be purchased at an equitable price” .

    Yeah, it might cause a trade war. You think we’d win?

    Part of the reason “Big Pharma” is willing to sign those deals is that it really isn’t a deal amoung equals.

  99. Nancy Lebovitz, ordinarily cut-n-paste is my frend, but we’ve been on the outs lately. I think it was that one night …. with too much booze and too many grils. It’s all kind of hazy now, but somehow he ended up going home alone, and I think he blames me.

  100. Nancy, thinking about it some more, I think you should be writing some letters-to-the-editor, pointing out that you’ve been advocating an end to the War on Drugs with little personal consequences. I’m pretty sure that most of the people who are against the War on Drugs keep their mouth shut lest they be accused of being a druggie. I’ve seen that happen locally; maybe you just have a better locality?

  101. Andy Freeman Says:
    >> I won’t bother to look them up just yet.
    >In other words, you’ve got nothing….

    You’re asking me to prove that politicians are wasting our tax dollars? Here’s an easy one:
    U.S. CBO estimates $2.4 trillion long-term war costs

    I suppose you’ll argue that the Iraq War wasn’t wasted money.

    >> Instead, I’ll ask you to please think about how many times the Republicans have been in control of Congress since FDR started the Great Bankrupt Society.
    >Repubs had control of the house in 46-48, 54-56, and 96-2006, so the answer is “not much”.

    Wait, you admit that the Republicans were in control of Congress for (around) 10 of the past 14 years? Four of those years were also with a Republican president, a rare event giving them extra freedom. If the Republicans had actually cared about reducing/stopping entitlements, they would have done so with even one year in control.

    Republicans don’t care about reducing entitlements. The so-called two-party system is an excuse to point the finger across the aisle while enlarging the government. It might be fair to say we have a de facto one-party system.

    Thank you for pointing out that the Republicans haven’t historically been in control of Congress as much as I had assumed. However, doesn’t change my point.

  102. # William O. B’Livion Says:
    > Until Canada passes a law carving out pharmaceuticals from patent protection,
    > or does some equally crazy shit like making it legal for the Canadian Government
    > to produce “necessary drugs that cannot be purchased at an equitable price” .

    And that would be bad exactly why? We Americans could presumably import those drugs, and the margins get squeezed here too. As I have said on numerous occasions I am in no way in favor of the legalized monopoly of patent protection.

  103. meat.paste, thanks for running some numbers on the cost of the War on Drugs.

    I expect you’ve got an underestimate there– if nothing else, trying to abolish poppy farming has made the war in Afghanistan a lot more difficult. Additionally, economically incapacitating people in prison and damaging their families and communities has hard-to-calculate costs, but they can’t be small.

    Still, eliminating all the effects of the war on drugs aren’t going to greatly affect the deficit.

    Making it a policy to let people know when they’ve given you a reason to change your mind is a bit of good manners I’ve picked up from Less Wrong, and I recommend it.

    Russell Nelson, I certainly should be doing more to oppose the war on drugs. The thing that would probably be most interesting is seeing whether the Tea Partyers could be convinced to sign on– the war on drugs is an expensive invasion of individual liberties.

    In my experience, the personal attacks if you oppose the war on drugs aren’t about being an addict or user yourself (though there’s some of that around marijuana), it’s about being too soft on drug users and/or endangering children.

  104. Nancy Lebovitz Says:
    > Still, eliminating all the effects of the war on drugs aren’t going to greatly affect the deficit.

    A hundred billion here, a half a trillion there: soon it adds up to real money. (Or to put it another way, the fact that the cost of the War on Drugs is but a small fraction of the problem speaks less to the significance of the War on Drugs and more to the outrage of everything else.)

  105. > You’re asking me to prove that politicians are wasting our tax dollars? Here’s an easy one:
    U.S. CBO estimates $2.4 trillion long-term war costs

    No. I’m asking you to support your claim that Repubs propose as much spending as Dems. Yes, Repubs do propose spending – the question is whether it is comparable. Your example is 2.4T over 16 years. That’s chicken feed by Dem standards.

    > Wait, you admit that the Republicans were in control of Congress for (around) 10 of the past 14 years?

    Why wouldn’t I admit it? Are you suggesting that you wouldn’t have in my position?

    > Republicans don’t care about reducing entitlements.

    I never claimed that they did. I claimed that they were less responsible for entitlements because they lamely opposed them and didn’t push them.

    Like I wrote – it’s the difference between manslaughter and murder.

    > Thank you for pointing out that the Republicans haven’t historically been in control of Congress as much as I had assumed. However, doesn’t change my point.

    Sure it does – the party in power bears more responsibility. That’s why you brought up Republican control in the first place.

  106. # Jeremy Says:
    > “The bill would grant employers an exemption from their 6.2% Social
    > Security payroll contribution for every new employee hired through the
    > rest of the year, as long as that employee had been out of work for at
    > least 60 days. “

    Not so Jeremy. This is broadly speaking, a good thing. It means that it is less expensive to employ new people, which means more people get employed. Which means that more people do productive things (rather than sitting on the couch watching Oprah.) Which means more value is generated. Which means (unfortunately) that the government is a net winner because the get to tax the new value.

    I recommend you do some research on the Laffer Curve.

  107. Andy Freeman,

    “smarter people stop loaning to govts. When the latter dominates the former, govts learn that they aren’t immune to economics.”

    If only that was so simple. The age of buy and hold is over, day trading rules the market. Smart people buy gov bonds because they hope they can sell it with 0,2% profit the next day to some sucker, or to another smart guy who will re-sell it the next day at 0,15% profit or 0,3% if he gets lucky.

    You see, in the day-trading sense you aren’t really loaning money in the sense that you don’t need to give a damn about the long-term solvency of the debtor. You are just betting someone, for some reason will pay a teeny bit more for your paper tomorrow that it worths today.

    I think in such circumstances the general market around government bonds must necessarily revolve around insider info and manipulation and have little to do with actual solvency. There is some bad news about a govt, bonds go down. Smart guy has friends at the right places (friends of friends of politicians), who tell him a *slightly* better piece of news a day earlier than the others got it. He buys bonds and sells them with 0,4% profit the next day when the suckers hear the news.

    In such a scenario it doesn’t matter at all if you know well enough a government will go bankrupt in 60 days. All that it matters is that on day 45 of that you some piece of info that makes you reasonably expect that the price of the bonds will bounce 0,4% up at day 44. That’s all.

  108. @JessicaBoxer:

    This is broadly speaking, a good thing. It means that it is less expensive to employ new
    people, which means more people get employed. Which means that more people do productive things (rather than sitting on the couch watching Oprah.) Which means more value is generated. Which means (unfortunately) that the government is a net winner because the get to tax the new value.

    I think what Jeremy means here is that in order to get all of this benefit, the government is robbing the Social Security trust fund yet more. None of that taxed value is likely to go back into the Social Security trust fund, either. I guess in the end, it doesn’t matter at which end the government robs the trust fund, though. The end-game is the same.

  109. “But I have significant assets in banks and brokerage houses, and I wonder if it will all just evaporate during a hyperinflation episode. I don’t want to put all of in in the mattress, but what would a prudent person do?”

    Don’t banking houses in the US offer investments or savings accounts in other currencies? Aren’t any Swiss banks around that offer accounts in Swiss Francs? Can’t you just buy some shares of Chinese, Japanese and German firms? Or simply a suitable index fund such as one that follows, say, the price of oil or basic foods or gold or whatever? Or stuff some bullions into a safe rented in a bank that’s not likely to be robbed?

    These things were to me more or less always obvious to me, and I kinda find it strange if they are not obvious to someone else, but don’t take it as a criticism. I’m from the folks who are world record holders in hyperinflation. (http://en.wikipedia.org/wiki/Hyperinflation#Worst_Hyperinflations_in_World_History). So it was kinda always on my horizont while you never really had to worry about it, until now. So what seems obvious to me may not seem so obvious to you, because it never was a real problem until now.

    Anyway. Gold, foreign shares, Swiss Francs, index funds.

    Neither is really sure on its own but all together look sure enough. For example gold may be in a bubble. As for Swiss Francs they have an excellent historical record. But most big Swiss bank accounts belong to big European firms doing their biz in EUR. So basically if we on the east side of the pond manage to fuck up the EUR, which is a clear possibility, the CHF will go down with it, because for the above reason they simply cannot drift too far apart from each other.

  110. >> Two good things happen when govts default: (1) stupid people lose money and (2) smarter people stop loaning to govts. When the latter dominates the former, govts learn that they aren’t immune to economics.

    > If only that was so simple. The age of buy and hold is over, day trading rules the market. Smart people buy gov bonds because they hope they can sell it with 0,2% profit the next day to some sucker, or to another smart guy who will re-sell it the next day at 0,15% profit or 0,3% if he gets lucky.

    Actually, it is that simple. Day trading or not, someone always owns the promise.

    > You are just betting someone, for some reason will pay a teeny bit more for your paper tomorrow that it worths today.

    And if you lose that bet, you lose your money. After a govt default, someone is holding a promise that won’t be satisfied. (Yes, it’s likely that some folks will find out sooner than others and get out of the market. The first folks to find out won’t lose as much as later ones.)

    > In such a scenario it doesn’t matter at all if you know well enough a government will go bankrupt in 60 days. All that it matters is that on day 45 of that you some piece of info that makes you reasonably expect that the price of the bonds will bounce 0,4% up at day 44. That’s all.

    For that to work, you’ve got to have stupid people buying on day 45. As long as they’ve got money, you can play that game. When they run out, you either don’t buy or you become one of the stupid people and lose your money.

    I’d much rather see defaults than hyperinflation.

  111. Modern ammunition stays usable for extended periods of time and might well be worth more than gold in an teotwawki situation. I’ve had an easier time talking my wife into getting ammo than I have getting junk silver

  112. > Modern ammunition stays usable for extended periods of time and might well be worth more than gold in an teotwawki situation.

    What definition of “modern” are we using?

    I ask because friends of mine used to have shooting contest with 75+ year old ammunition.

    I don’t know how well new stuff holds up.

  113. Andy, I meant “metallic cartridge” ammunition. I was curious about some 60 year old .270 and asked a gunsmith if it was safe – he said yes. I’d be surprised if recent issue didn’t last as well, though I believe primer formulations are different – I’m certainly not an expert in this field.

  114. Jeremy, actually, reducing SS payroll taxes temporarily is the one move most free market economists have been recommending for some time now, as it will directly incentivize companies to hire more workers. Of course, Congress has been ignoring that advice and using the recession as an excuse to steal more money from the populace and dole it out to their backers, ie the “stimulus” spending. As morgan notes, you’re taking money from SS either way, but one is actually useful.

    Shenpen, if people want to trade and make the bond market more liquid, what does it matter to you? They’re always sitting on the risk that the market might dry up at any time, maybe day 44, maybe day 60, which is precisely what happened to all the banks that got caught with a bunch of mortgage and real estate-backed securities. They took those risks, got caught, and paid the price: whatever govt intervention has taken place, the shareholders and executives of Bear, Lehman, Freddie and Fannie all pretty much got zeroed out.

    Jess, while I broadly agree with your anti-patent and anti-”intellectual property” stance, particularly as currently conceived with government licensing, I think pharmaceuticals deserve some real thought. Here’s a good with huge up-front costs and negligible marginal costs of production that is hugely beneficial to society (by comparison, I could care less if the music industry dies). I think we’ve chosen the wrong way to incentivize it with patents, but it will need some sort of incentive system. What I’d like to see is some sort of private system, where the testing costs can be appropriately pooled and renumerated. I imagine the way to enforce it will be contractual or through social pressures. For a simpler example, child labor might be employed in various countries around the world and each consumer can have their preference toward such goods saved in their computer/smartphone. For those who’re against it, those products wouldn’t even be presented to them. For those who’d rather pay a cheaper price as long as the kids aren’t working in sweatshops, they’d be shown those goods. I imagine something like that could be setup for medical testing costs too, among many other goods, now that such information from up and down the supply chain can be easily communicated to consumers and filtered for.

  115. Ajay Says:
    > Jess, while I broadly agree with your anti-patent and anti-”intellectual property” stance,
    > particularly as currently conceived with government licensing, I think pharmaceuticals
    > deserve some real thought.

    That bunch of anarchists at the GAO gave it a lot of thought and concluded that patents in the pharma industry decreased innovation. Yup, that great theory that monopolistic profits would guarantee a supply of new drugs turns out in practice to be wrong. The monopolistic practice actually drives up costs (as monopolies always do), and decreases the number of new drugs we have.

    How is this possible? Quite simply that people only look at the incentives patents provide, and forget the disincentives they also provide. There are many such disincentives, and the GAO concluded that they outweighed the incentives. For example, there is no incentive to improve your product, there is no incentive to make it cheaper, there is no incentive to beat out a competitor by being more efficient, there is no incentive to make a small innovation to an existing product. All you do is sit fat and happy on your cash cow for thirty years.

    The justification for granting of these special monopolies by the government is that they increase innovation, the purpose is not to make people rich. In practice they do the latter and not the former, and we pay two hundred dollars for pills that cost ten cents to make, because the government puts the competitors out of business.

    I agree the drug industry offers a huge societal good. All the more reason to free it from the shackles of the patent system. In my opinion, the patent system is literally killing us because of the disincentives to innovation it provides. Yup, real people, dead. (And don’t get me started on the FDA.)

  116. Ajay, one more thing, I’d much rather they enforced music copyright than patents. At least Britney Spears only asks for a buck to listen to her do it again. The patent system is stealing away drugs that let you Mom live another ten years, or drugs that alleviate the chronic pain your neighbor is suffering because of some disease, or medical devices that allows that sick kid to get treatment to save them from death at the hands of Leukemia.

    Britney might hurt your ears, and might cost you a few bucks, but at least she won’t kill you.

  117. Jess, all good reasons why the patent system isn’t the right solution to incent drug investment, which I already stipulated to, but none of which gets at what I said: what do you replace it with? Using patents for drugs is a hack, which isn’t to encourage innovation but to provide a monopoly so that the drug companies can recover their gigantic medical testing and safety costs, which dwarf the initial R&D costs. That’s why I said drug patents are the wrong solution, as the goal isn’t really innovation, but we will need to replace them with some solution: that is what I tried to sketch out a bit in my previous comment. As for copyright enforcement, that genie is out of the bottle, it is impossible to enforce copyright online. I don’t think that’s too much of a problem, as I have some ideas how creators can still make money online, but I don’t think any of those ideas can save recorded music. Recorded music was in a peculiar position that it was perfectly suited to the old system of copyright, small blobs of information that were in high demand and that were tough to copy off the vinyl records they came on. Well, times have changed and they’re particularly unsuited to the present technological climate. Musicians will still make money through live performances or licensing their music to other content creators, but I think the time of selling recorded music to consumers is over.

  118. Ajay Says:
    > but we will need to replace them with some solution:

    How about a market that rewards success, and punishes failure and that applies the same regulatory testing requirements on everyone equally? (Though in the latter case, I’d rather it was via private testing.)

  119. Andy Freeman:

    What definition of “modern” are we using?

    I ask because friends of mine used to have shooting contest with 75+ year old ammunition.

    I don’t know how well new stuff holds up.

    Older corrosive ammo, Berdan primed, will last 100 years with proper storage in a cool, dry environment. “Proper storage” being defined as a sealed can or case that keeps it away from constant exposure to the open air. Sardine cans are best but ammo cans with good seals (such as .30 or .50 caliber surplus US ammo cans) work just as well.

    Newer ammo is Boxer primed and is all commercial manufacture for the past 70+ years. Estimates indicate this ammo, stored as above, is good for upwards of 50 years. I’ve heard estimates of up to 80 years. Not as good as Berdan primed but good enough if you’re looking to hold it for a couple of decades. Especially if you’re buying it new and know when you bought it. Past about 50 years, start expecting failure-to-fire.

    Only exception is old rimfire ammo. Treat it as modern Boxer primed regardless of age. The primer chemicals in the rim are more prone to breakdown over time and are more likely to fail with extreme age. Rimfire ammo made in the late 19th century is no longer functional and a collector’s item. Same goes for a lot made in the early 20th century.

    I have fired Berdan primed ammo that is 70-80 years old with no issues. Never had one not go off. 8x57R, 7.62x54R, .303, 8mm Mauser and so on. All of my modern ammo is .223 or .308 and is between new and 30 years old. All of my older Boxer primed ammo is sealed in military cans and battlepacks. I don’t open them until I need the ammo. Just with what I have on hand now I’m probably good on reliable ammo for another 20 years. All of my loose or boxed ammo is stored in sealed ammo cans until use.

    Hope this helps.

  120. Andy Freeman,

    basically my point is that it’s not true that smart people will not lend money to governments. Of course they will, they will just hold on to that bond very long. Basically what I’m trying to say is that the day trading market is not based on the real value but on relative value differences between different expectations one day and another. Eh, that’s not a very exact way of putting it but I don’t know how to put any better way. Basically, you don’t consider on the day trading market how much X really worths (such as by time discounting the interest paid while factoring in the risk of default), but basically you are just considering if X will worth a bit more tomorrow than today or not.

    In other words if there is a well-known reckless person who has a very bad track record of paying his debts, and there is 90% chance of a default and therefore his debt is trading on a very low price, you would still buy his debt if there is news that someone saw him shooting up heroine and thus the price drops, if you know the news are false, because when tomorrow everybody will know the news are false and thus the price will climb back up a bit.

    I’m lacking the proper technical terms about this sort of thing, thus I dubbed it “real value” and “relative value differences”, probably there are much more precise terms to describe it, but I hope it’s still understandable. Like, buying something that’s 96% made of shit still worths it if today everybody thinks it is 98% made of shit and tomorrow they will wisen up.

  121. JessicaBoxer,

    “The patent system is stealing away drugs that let you Mom live another ten years”

    What about the increased incentive to protect trade secrets by aggressive ways? Such as murdering a high-level researcher who is about to quit and join a competitor? If there are no _legal_ ways to force another corporation not to imitate your product, there could be an awfully high incentive to protect secrets by any way “necessary”, up to lethal force.

    I’m talking about actual historical experience and not just a scenario from a cyberpunk novel: Medieval Venice. Making excellent glass products incl. wonderful mirrors was a fiercely guarded trade secret of the whole city (consider the city itself as a kind of a corporation) and glass-making masters who moved abroad were followed by secret agents, were bullied, threated, even murdered.

    Consider this: sometimes it is better to allow people to use some amount of legal coercion against each other, because otherwise they might be strongly incentived to use a very brutal illegal coercion. It’s the same sort of incentive analysis that results in 95% of the cases in Libertarian solutions but there is no law of nature that it must result in so in 100% of them, because people ain’t softwar and societies ain’t computers, in other words, like the game theorists and soccer fans say, certain well-mixed strategies tend to outcompete one-sided ones, of course, like the winning strategy of tit-for-tat, it must be mixed but a little, 95%-5%.

  122. “I’m talking about actual historical experience and not just a scenario from a cyberpunk novel: Medieval Venice. Making excellent glass products incl. wonderful mirrors was a fiercely guarded trade secret of the whole city (consider the city itself as a kind of a corporation) and glass-making masters who moved abroad were followed by secret agents, were bullied, threated, even murdered.”

    I forgot the real point: it happened so because there were no legal ways of enforcing the patent.

  123. Shenpen Says:
    > Consider this: sometimes it is better to allow people to
    > use some amount of legal coercion against each other,

    Yes, it is called a contract, voluntarily entered into, and enforced by the courts. This is how the vast majority of trade secrets are protected.

  124. @Michael Hipp:

    Thank you for the link. Total bookmark!

    Yes, Krugman is highly erratic. Unfortunately, we have two specific narratives on the role of government debt in the economy, and both seem to depend on initial assumptions. Either people assume it’s bad or assume it’s good, and proceed from there. This puts me in the unfortunate position of not being able to reject what he says out of hand.

    There is historical data which suggests that Great Britain ran *massive* deficits for decades, and had little or no deleterious effects from this. Then again, GB was highly mercantilist at the time. Indeed, I have seen people claim that once GB stopped having deficits, they ran into a deflationary spiral.

    My natural inclination is to side with hayek, but there is the unfortunate “if I buy an overcoat, will it raise unemployment?” incident, which I still can’t really even parse. http://blog.mises.org/88/did-hayek-really-say-that/ I don’t think Hayek had that good a story on what eventually became Monetarist doctrine. And Monetarism’s claim is that government borrowing really did end the Great Depression, by putting the economy on a war footing. SFAIK, Milton Friedman and Krugman aligned on this one particular topic.

  125. > The justification for granting of these special monopolies by the government is that they increase innovation, the purpose is not to make people rich. In practice they do the latter and not the former, and we pay two hundred dollars for pills that cost ten cents to make, because the government puts the competitors out of business.

    The govt only puts competitors out of biz if said competitors are infringing on patents.

    It’s not clear that an “open source” drug company would necessarily run into patents wrt its new drugs.

    So, why isn’t anyone trying to do an open source drug company?

  126. # Andy Freeman Says:
    >The govt only puts competitors out of biz if said competitors are infringing on patents.

    Right, which in the drug business generally speaking is the definition of “competitor.”

    > So, why isn’t anyone trying to do an open source drug company?

    Same reason there are no open source cars. Drugs are expensive to make and design. Software takes a $500 computer. One of the reasons drugs are so expensive to make and design is because it is one of the most heavily regulated industries in the world. If any of you have ever worked on software for a medical device (as I have) you will know what I mean. Of course higher standards are required when lives are on the line, however, the simple fact is that most of the burden is simply pointless red tape bureaucracy.

  127. >Of course higher standards are required when lives are on the line, however, the simple fact is that most of the burden is simply pointless red tape bureaucracy.

    I worked on low-risk medical devices some years ago, and I was not impressed by the thoroughness of the FDA inspections. I had in fact hoped that they would form the impetus for positive change in that company, being that their approach to software quality seemed to be to throw as much documentation at a program as possible without worrying about whether those documents formed a compelling argument for safety. Have you worked on safety-critical devices? I’m curious as to what extent my experience was due to the fact that we were developing low-risk devices.

  128. >How is this possible? Quite simply that people only look at the incentives patents provide, and forget the disincentives they also provide. There are many such disincentives, and the GAO concluded that they outweighed the incentives. For example, there is no incentive to improve your product, there is no incentive to make it cheaper, there is no incentive to beat out a competitor by being more efficient, there is no incentive to make a small innovation to an existing product.

    I’m not an expert on the pharmaceutical industry, so I don’t know where the majority of the costs come from. The argument I seem to hear anecdotally is that the initial R&D and testing costs are large enough that patents are required to make that activity profitable. I’d be interested to hear of any evidence to the contrary. Don’t R&D firms have large incentives to improve the efficiency of their processes for discovering new drugs under the patent scheme?

    >All you do is sit fat and happy on your cash cow for thirty years.

    Does it take less than 30 years to recover the initial R&D costs? If you decreased the duration of the patents, wouldn’t that decrease investment in the industry?

  129. This is how the vast majority of trade secrets are protected.

    The entire point of a patent is that, in exchange for a limited time period to exclude others from exercising the technology you’ve invented, you have to disclose your method. This is the antithesis of a trade secret. The idea, of course, is that others will be able to build on the disclosed knowledge.

    The medieval practice of trade guilds that jealously protected their secrets didn’t foster much in the way of innovation. The same secrets were handed down for centuries within the guilds.

  130. Jess, I agree with you in principle that the market will figure out a way to incentivize drug investment, but you don’t seem very credible to most people if you can’t suggest what such a private system might look like. That’s why I’ve tried to grapple with what it might look like myself. Another option is that some people would simply choose drugs with less testing and pay less for that. This recent Stossel episode (btw, Stossel’s doing some great shows on Fox Business nowadays) had a doctor on talking about how they spent millions going through the first couple rounds of FDA-mandated testing, but that his investors balked at the next round that would’ve cost an additional $100 million. Without the FDA monopoly mandating all those rounds, people could buy drugs at the various stages of testing and pay less depending on which stage they bought in at. I’ve thought for some time that the biggest medical failure nowadays is that we don’t collect epidemiological data on drugs that are released, I’m sure that would have caught the Vioxx issue much earlier. Such people who bought drugs before all the controlled testing had been done would be perfect candidates for such data collection.

    Shenpen, if you need to bring out an example from 800 years ago to make your case, you don’t have much of a case. ;) There are plenty of companies that protect their trade secrets just fine today, without having to off their employees. Google dominates search, what stops Microsoft from just buying off their employees for their trade secrets and beating them in search? It’s not patents keeping Google ahead. The case for patents generally is very weak, but although they’re misapplied to pharmaceuticals, I think that’s the one sector that deserves some thought.

    Les, I think you’re out of your depth. Hayek was likely making a highly technical point about a particular situation that you’re interpreting far too broadly. Monetarism generally has nothing to say about WWII’s effect on the end of the Great Depression, it can’t as it’s a monetary theory that views fiscal spending such as the war as generally being wasteful. Their real argument was that the Fed caused much of the great depression by shrinking the money supply after the crash, the opposite of what Bernanke is doing today. I don’t know where the monetarists tend to come down on the issue of that war specifically, but free market economists have argued that that conventional explanation is wrong.

    Andy, what? An open source drug company would be sued out of existence, just as Apple is trying to do to HTC today with the open source Android.

  131. Roger Phillips Says:
    > I worked on low-risk medical devices some years
    > ago, and I was not impressed by the thoroughness of the FDA inspections.

    Shocked though I am to admit it, I completely agree with you. I was not suggesting that I thought the FDA process was thorough, rather, it is overwhelming, which is not the same thing. My experience is the same as yours (and I have worked on life critical devices), which is that what the process lacks in quality it makes up for in volume.

  132. Roger Phillips Says:
    > The argument I seem to hear anecdotally is that the
    > initial R&D and testing costs are large enough that
    > patents are required to make that activity profitable.

    This is indeed the argument. However, what you must remember is the fact that it is a publicly regulated it is much more expensive to do so that it could be. You yourself have observed this as you mentioned in your previous comment. Drug testing requires the generation of mountains of paperwork, most of which is worthless.

    Further the incentive system has been set up in such a way that it is much more important to stop drugs from hurting a few people than it is to release drugs that help orders of magnitude more people. This, I think has its origins in the Thalidimide situation, which seems to me to have engendered an excessively cautious attitude in the FDA.

    So in addition to the pointless baloney, the bar for the risk reward ratio is set completely wrongly too, heck I reject the notion that it should be set at all, though obviously it should be measured.

    > Does it take less than 30 years to recover the initial
    > R&D costs? If you decreased the duration of the
    > patents, wouldn’t that decrease investment in the industry?

    My desire is not to make drug companies rich, it is to have increased innovation and decreased prices. The GAO study said patents have the opposite effect. All these calculations seem irrelevant in face of this fact.

  133. >This is indeed the argument. However, what you must remember is the fact that it is a publicly regulated it is much more expensive to do so that it could be. You yourself have observed this as you mentioned in your previous comment.

    I don’t think this is necessarily the case; the company was not just producing paperwork for the FDA, but rather it was also a by-product of a culture of busywork where a certain segment of people spent most of their time doing anything but producing and checking work. After all, many of them would have nothing to do if they couldn’t fiddle with arbitrarily scheduled gantt-charts all day. Nonetheless, it’s interesting that part of the reason said company was able to operate this way because of the patents it had acquired.

    >Drug testing requires the generation of mountains of paperwork, most of which is worthless.

    I don’t know whether this is true, since I’ve never worked in that area.

    >Further the incentive system has been set up in such a way that it is much more important to stop drugs from hurting a few people than it is to release drugs that help orders of magnitude more people. This, I think has its origins in the Thalidimide situation, which seems to me to have engendered an excessively cautious attitude in the FDA.

    I think the kinds of side effects you consider acceptable is mostly a matter of personal choice. If you accept that premise, then accurate determination of side-effects seems to be more important than the side-effects that are permitted by law. If as a consumer I understand what the effects of some drug are, then I can make an informed decision about whether to take it or not.

    On the other hand, there are issues that seem very difficult to frame as personal choice, such as the misuse of antibiotics. The choice of some individual to misuse antibiotics can lead to great harm to other people who become infected with the resistant bacteria that are produced by such misuse. This seems to be very much a public issue.

    >My desire is not to make drug companies rich, it is to have increased innovation and decreased prices. The GAO study said patents have the opposite effect. All these calculations seem irrelevant in face of this fact.

    Right now I don’t have the interest to pursue this topic in-depth; however, you present a case for patent abolition that’s compelling to my superficial understanding.

  134. Well, in case you haven’t noticed, looks like healthcare reform is coming to America — yeah, right. Pretty much the same thing which Massachusetts has now, meaning Big Insurance wins and, if you work for yourself or a company too small to have a group plan, you’re stuck with the $400/month bill you are now forced to pay for crappy coverage.

    But hey, where freedom dwells, amirite?

  135. > All you do is sit fat and happy on your cash cow for thirty years.

    Exaggerate much?

    US patents last for 20 years from date of filing. Filing must happen well before clinical trials (because of foreign bar date issues), which is long before FDA approval. So, if a drug takes 10 years to get through the FDA (which isn’t uncommon), it has at most 10 years of US patent protection. In practice, the number will be less because you end up filing well before starting FDA approval. In fact, it’s quite possible for FDA approval to happen after the patent expires.

    Yes, they play “new usage” games to try to get additional patents at later dates, but generics can be made for the old usage and doctors can prescribe appropriately.

  136. > Google dominates search, what stops Microsoft from just buying off their employees for their trade secrets and beating them in search?

    It’s the same thing that keeps Pepsi from hiring the folks who know the formula for Coke, namely trade secret law.

    > Andy, what? An open source drug company would be sued out of existence, just as Apple is trying to do to HTC today with the open source Android.

    If an open source drug company is doing new drugs, it has nothing to fear from existing drug patents. (Publishing stops others from patenting what it’s doing.)

    Here’s why.

    Drugs consist of a small number of compounds. The relevant patents are for use of those compounds plus manufacturing techniques. The latter tend to be quite specialized because the generic techniques are “old enough” by now.

    As a result, here’s almost no overlap between patents on different drugs. In other words, Merck’s patent portfolio just keeps Abbott from producing clones.

  137. # Ajay Says:
    > Jess, I agree with you in principle that the market will
    > figure out a way to incentivize drug investment, but you
    > don’t seem very credible to most people if you can’t
    > suggest what such a private system might look like.

    First of all, I don’t need to figure out a way. I don’t run a drug company and my livelihood does not depend on it. It is funny how motivating the prospect of loosing your job and fat paycheck is.

    Second, it isn’t all that hard to imagine what such a system would look like, especially so in the medical industry — we have expert advisers all over the place in that industry. All you need is a registry of tests, where every drug medical test is registered before it is conducted, and its results logged. Registering can be completely voluntary of course, but any drug company that does not register doesn’t get the downstream benefits of results publication. Then the normal academic process can review these tests to determine what is a good drug or a bad drug, and under what circumstances.

    Perhaps a branch of the AMA or several of the other medical professional bodies could summarize that data for doctors, or perhaps some enterprising medical publisher could produce a handbook of new drugs. Then, based on a doctor’s evaluation of these criteria, and with informed consent, patients could make the risk/reward calculation themselves. No doubt doctors would evolve criteria for making that judgment, as they have in all other parts of medicine (and they would be allowed flexibility to make different judgments in special cases for particular circumstances.)

    > the next round that would’ve cost an additional
    > $100 million.

    Just think about that for a second. $100 million to conduct one round of drug testing. Why? All they are doing is taking a few thousand people and supplying them with drugs for a couple of years and some medical testing. Then they monitor the results for a while. How can something so simple really cost $100 million? President Obama is concerned about the cost of healthcare, perhaps this might be an area to dig into.

    > I’m sure that would have caught the Vioxx issue much earlier.

    Vioxx is an example of the whole system going wrong. Vioxx is a perfectly good drug. In large doses over long periods of time it caused a slight uptick in the risk of cardiac events. However, in all the rush to pull it, the actual benefits of the drug were forgotten. It allows people with arthritis and menstrual pain to alleviate their symptoms without causing the stomach bleeding and ulceration caused by the alternatives. However, Merck robbed these patients of that choice because of the fear of insane lawsuit judgments that bear little measure of reality. Apparently, patients are not allowed to choose the risk reward ratio, even with advice from their doctor. Apparently, the alternative strategy of having patients offset the slight increase in risk with, for example, lifestyle changes, is not something we are going to allow them to choose.

    What is particularly distressing about this situation is that the alternatives, which have other unpleasant side effects, also increase the risk of cardiac events, about the same amount according to one source. However, most of them are generics (Ibuprofen and Aspirin for example) so there isn’t a big lawsuit target. That means the patient is punished with more severe side effects without any offsetting benefit. I guess we should just let all these women cramp over in pain during their periods, or people have their lives debilitated by arthritis. (It is worth noticing, by the way, that one of the effects of arthritis pain is that it discourages people from exercise, which is a pretty good way to offset any cardiac risks — ironic that, isn’t it?)

    It is worth noting that Merck pulled this drug on its own, AFAIK, most regulatory agencies actually wanted Merck to keep it on the market, and that is saying something given how amazingly risk averse these agencies are. So this does not lie at the feet of the FDA, but at the feet of the tort system.

    The Vioxx withdrawal is a crime, it is a symptom of a sick system.

  138. > > Does it take less than 30 years to recover the initial R&D costs? If you decreased the duration of the patents, wouldn’t that decrease investment in the industry?

    > My desire is not to make drug companies rich, it is to have increased innovation and decreased prices.

    Fair enough.

    > The GAO study said patents have the opposite effect. All these calculations seem irrelevant in face of this fact.

    No, they’re not irrelevant. If a company doesn’t expect to be able to recover its costs of developing a new drug, it won’t do so. It doesn’t matter where those costs come from or what they accomplish – if they have to be paid, they have to be recoverable from revenues.

    Plus, companies like to maximize profits. If the first company to ship a new drug has to pay costs that the second company doesn’t pay, the first company better have some way to make up for that difference. Otherwise, there’s no point in being the first company.

    It may well be that eliminating drug patents will reduce innovation absent significant reductions in the FDA tax.

  139. “Second, it isn’t all that hard to imagine what such a system would look like, especially so in the medical industry — we have expert advisers all over the place in that industry. All you need is a registry of tests, where every drug medical test is registered before it is conducted, and its results logged.”

    You speak of the drug development process as if it starts with human trials. How would you propose to significantly reduce the costs generated by initial compound discovery, purification, (a few years down the road): tissue testing, (a few more years): animal testing, etc. that have to be well documented and established, and most importantly, generating sufficiently positive results, just so you can actually give it to a human being? What of novel compound types, such as one that I worked on which had to be protein-derived in a pure line of cells, then separated and bottled, with every step of the process having to occur in clean-room type conditions? The ideas for such things may come from Universities, but actual scaled manufacturing necessary just for the first step of bench lab testing requires enormous funding. Which brings me to:

    “Just think about that for a second. $100 million to conduct one round of drug testing. Why? All they are doing is taking a few thousand people and supplying them with drugs for a couple of years and some medical testing. Then they monitor the results for a while. How can something so simple really cost $100 million? President Obama is concerned about the cost of healthcare, perhaps this might be an area to dig into.”

    I’m sorry, but this is an almost insultingly shallow and uninformed summary of drug development. Not sure what you mean by “round of drug testing” but I’m assuming that you start with an unknown compound and expect a deliverable, tested and working product at the end of the round. If I am correct, then the answer is, “We the people have decided that we’re not allowing you to stick untested compounds in our bodies just to see if we happen to get some relief from a disease/condition. You better have it well-established that the drug has a high probability of helping us (and not substantially increasing our suffering in other ways) before you even ask us.” The FDA didn’t just fall out of the sky; it is a reflection of what the people of the country broadly expect.

    It does indeed take 10-12 years, at best, to get sufficient data for a compound to get labeled and released into the market. I think about 10% of compounds actually make it that far – the rest fail at some point in the loosely-described process above. In recent years, pharma companies have gotten better about identifying compounds that will likely have terminable issues earlier in the process, thus keeping the R&D costs down a little. But the rules are unchanged: if you want to create the next blockbuster, you better get every cent from Viagara that you can get. And the blockbusters are the only thing that even allow good-meaning people a chance at helping those with less common, currently untreated, needs – they are the lubrication that allows the wheels to turn out less-than-profitable compounds. To put it bluntly, if you want therapies for rare diseases, you better cheer every time a company discovers something like Viagara.

  140. @Andy Freeman:

    If a company doesn’t expect to be able to recover its costs of developing a new drug, it won’t do so. It doesn’t matter where those costs come from or what they accomplish – if they have to be paid, they have to be recoverable from revenues.

    Agreed, but I’m not so sure that the patent system is the only way to do so. Someone else mentioned trade secrets, and while trade secrets have their problems, they can be a very effective tool in managing a company’s potential competition. Bear in mind that the software industry existed and flourished for years before software became patentable.

    (Sidebar: In a previous blog entry, esr talked about Haskell and one of the advantages was the all Haskell programs can be easily mathematically proven since Haskell doesn’t allow side effects. The implication is that all software programs are really mathematical algorithms. Mathematical algorithms cannot be patented under U.S. law (or any other WIPO country), so this means that software shouldn’t be patentable, right? What about drug formulae? Are they really mathematical algorithms as well?)

    It may well be that eliminating drug patents will reduce innovation absent significant reductions in the FDA tax.

    Did a lack of software patents reduce innovation in the software business? How about the converse: after software patents were added, did innovation in the software business increase?

    Bear in mind that when talking about business concepts, a widget is a widget.

  141. # Satanam in computatrum Says:
    > You speak of the drug development process as if it starts with human trials.
    > … Not sure what you mean by “round of drug testing”

    I suggest your read the context of the discussion before you get all huffy. This was in reference to a specific part of the process, which was a human trail, that is what I meant by “round of drug testing”, or more to the point, what the person I was replying to meant by “round of drug testing.”

    > “We the people have decided that we’re not allowing
    > you to stick untested compounds in our bodies just to
    > see if we happen to get some relief from a disease/condition.

    We the people also decided at one point that you couldn’t put alcohol in your body, or drink from a particular fountain if you had darker colored skin. We the people still say that if you are both of the same sex you can’t have the same marital benefits as if you are not of the same sex. We the people make mistakes, and the point of political discussion is to fix the mistakes.

    When it comes to this issue, let me tell you, it is none of your damn business what I and my doctor decide is a good thing to put in my body. That is what the word “my” means.

    > The FDA didn’t just fall out of the sky; it is a reflection of
    > what the people of the country broadly expect.

    If that is the case then remove the mandatory aspect. Let the FDA compete with private agencies, and raise their funds from voluntary contributions (from drug companies in exchange for certification marks for example.)

    The FDA is indirectly responsible for hundreds of thousands of deaths because of its delayed approval of life saving drugs, drugs that were often widely available elsewhere in the world. Let it stand on its own feet, and justify itself voluntarily rather than forcing its will on “We the People.”

    > To put it bluntly, if you want therapies for rare diseases,
    > you better cheer every time a company discovers something like Viagara.

    I do cheer for every great discovery, but I find your comments about rare diseases particularly unfortunate given that drug companies simply cannot make drugs for such diseases because the regulatory cost is too high. If you had a rare disease that was terminal, which would you choose: take a risk on a drug that had shown considerable promise but had not fully proved itself, or do nothing and accept your fate?

    You are welcome to make either choice, however, I think YOU should make the choice, in consultation with your doctor, not some ass covering political appointee in Washington.

  142. “We the people also decided at one point that you couldn’t put alcohol in your body, or drink from a particular fountain if you had darker colored skin. ”

    Wow…this is the kind of thing you think I referred to? With leaps like that, you should try out for the Olympics…

    You would benefit greatly from a reading of the FDA’s history prior to WW2. You know, when things were done pretty much exactly as you describe. The reason your doctor has information on which to make these informed decisions is that the FDA mandated the trials that generated it. Those trial results didn’t fall out of the sky either. And those trials weren’t done prior.

    When you get a moment, peruse the warning letter section of the FDA’s website. Look specifically for how frequently companies get their hands slapped for either mislabeling or falsely labeling various healthcare products-you’ll have to wade through the food-related ones, unfortunately. Then guess at what percentage of those the FDA doesn’t catch. You and your doctor need reliable info to make your decisions, yes?

    By the way, I am not quite huffy yet, more like amused. I merely found your comment insulting.

  143. Satanam in computatrum Says:
    > Then guess at what percentage of those the FDA doesn’t catch.
    > You and your doctor need reliable info to make your decisions, yes?

    Don’t you find these two sentences interesting in juxtaposition?

  144. Andy, you’re making my point that Google doesn’t need patents or to kill its outgoing employees ;) in order to thrive today. However, if your point is that contracts are not enough and that some trade secret regulations are necessary, I’m skeptical of such a claim. Also, given how overly broad software patents are and what I hear about similarly idiotic gene patents, I’m similarly skeptical of your claim that a new drug company could test out a no-patent model. I hope that’s the case but I’m doubtful that it is.

    Jess, I agree that you don’t quite have the incentives to figure out what a market without drug patents would evolve into, but you should at least be able to limn what it might look like if you’re going to suggest such a big move as getting rid of drug patents. I agree with you about getting rid of drug patents, but I don’t think you’re making a very good case to most people if you don’t explain what is likely to replace the current system. While you suggest a new regime for private testing, you don’t get at the root of the problem, how that new system would be paid for without a patent monopoly, as you don’t talk about prices much, other than suggesting that the regulatory burden of testing is perhaps too high today. Perhaps you meant for such a private testing regime to be paid for in the way I suggested earlier, where patients pay less if their drug is earlier in the testing process? The economics of pharmaceuticals without drug patents are the key issue here, not the ins and outs of a private testing process. As for the Vioxx situation, my guess is that if they left it out there some idiots could always claim that they didn’t know about the increased risk, even after all the publicity, and that their family member died because of it, so they should be paid. As you say, that falls at the feet of the shitty legal system, yet another publicly provided service that will likely go private soon.

    Satanum, Correct me if I’m wrong but I believe the R&D and manufacturing costs you’re talking about are generally a small fraction of the human testing and safety costs that Jess was talking about. If you believe we need drug certification of the form the FDA provides, why do you think it could not be provided by competing private agencies, as Jess calls for?

    Morgan, the way software patents get around that is by tying the algorithm to a particular type of hardware, I bet the drug patents do the same. However, this type of legal hair-splitting is not really worth talking about as I don’t believe hardware patents are worthwile either. A widget is not a widget as you can’t simply take some closed-source software and knock it off and easily release new updated versions of it. However, you can fairly easily reverse a chemical compound and manufacture it yourself. Drug patents are a bad idea but pharmaceuticals are fundamentally different from other markets and we need to think hard about what we’d replace that particular patent monopoly with.

  145. What they catch will never be 100%, Jessica, but it’s a sight better than what it would be otherwise, if history is any indication. That was my point.

  146. > Agreed, but I’m not so sure that the patent system is the only way to do so.

    I didn’t say that it was. I was just pointing out that you can’t ignore costs.

    > Someone else mentioned trade secrets, and while trade secrets have their problems, they can be a very effective tool in managing a company’s potential competition.

    “can” doesn’t mean “does in all relevant circumstances”.

    > Bear in mind that the software industry existed and flourished for years before software became patentable.

    Software also, for the most part, doesn’t have an FDA tax to recover.

    > Sidebar: In a previous blog entry, esr talked about Haskell and one of the advantages was the all Haskell programs can be easily mathematically proven since Haskell doesn’t allow side effects. The implication is that all software programs are really mathematical algorithms. Mathematical algorithms cannot be patented under U.S. law (or any other WIPO country), so this means that software shouldn’t be patentable, right?

    Wrong.

    You can’t patent theorems (or facts), but you also can’t patent newly discovered physical phenomena or new arrangements of matter, such as the wheel. You can, however, patent the use of such things to do something.

    Take the topic of discussion – drugs. The Viagra patent doesn’t cover the use of the relevant compound(s) to polish ball bearings. So, if you discover that Viagra is good for polishing ball bearings, you can get a patent for using it for that purpose, a patent that will let you make and sell it (for that purpose).

    > What about drug formulae? Are they really mathematical algorithms as well?

    Doesn’t matter.

  147. > However, if your point is that contracts are not enough and that some trade secret regulations are necessary, I’m skeptical of such a claim.

    Contracts can’t work because of the “blood from a turnip” problem.

    My personal liability is limited by my assets, which has little relationship to the value of trade secrets that I know. In other words, suing me for revealing trade secrets provides almost no protection.

    Besides, there’s a jurisdictional problem. If I move to the EU, a US civil court can’t reach me.

    More to the point, the trade secrets contract that I sign can can’t stop a US company from taking advantage of what I choose to reveal.

  148. > Apparently, patients are not allowed to choose the risk reward ratio, even with advice from their doctor.

    The problem is not that they can’t choose, it’s that they aren’t responsible for the consequences of their choice. Or rather, if things don’t work as they hoped, they can sue.

    I think that we’d be much better off if disclosure was a liability defense. For example, Toyota could say “our cars will have an accidentxseverity product no higher than x” and if that was true, they’d be immune from product defect lawsuits.

  149. My personal liability is limited by my assets, which has little relationship to the value of trade secrets that I know. In other words, suing me for revealing trade secrets provides almost no protection.

    But being sued for all you own does provide a fairly effective deterrent, does it not?

  150. # Satanam in computatrum Says:
    > What they catch will never be 100%, Jessica, but it’s a sight better
    > than what it would be otherwise, if history is any indication. That was my point.

    So you advocate a cathedral rather than a bazaar method? I believe that someone once said that with many eyeballs, all bugs are shallow.

  151. @Tom Dickson-Hunt:

    Except under current U.S. law, you effectively can’t be sued for all you own. You have to have assets that have a significant dollar value attached to them.

    Examples of “significant dollar value” would be real estate, luxury items like a big boat, or something like that. They can’t take your place of primary residence (but they can put a lein on the mortgage with much effort), whatever “tools of the trade” you use to make your living (computer equipment for programmers, for example), the vehicle you drive to work, etc. They can take cash from the bank if you have enough of it there, but if your money is tied up in say, an IRA or something like that they generally can’t touch it. They can attach your tax returns under certain circumstances and they can garnishee your wages, but they can’t do that if you own your own business, for example.

    Furthermore, you can always declare bankruptcy.

    Someone without significant assets to cover the liability is considered effectively “uncollectable”. That’s what Andy means by the “blood from a turnip” problem.

  152. > But being sued for all you own does provide a fairly effective deterrent, does it not?

    Not really. Lots of folks are willing to take a huge hit to hurt someone/something. Besides, there’s the jurisdictional problem – a US court can’t get my UK assets, especially if I’m there.

    There are lots of other holes. For example, I can give the secret to my brother in law who then makes money and lets my family live with him. No money is changing hands and he’s not liable for my debts.

    Effective trade secre protection requires sanctions on all recipients. It’s sort of like why we don’t let innocents who buy stolen property keep it or compensate them for the price that they paid.

  153. Besides, there’s the jurisdictional problem – a US court can’t get my UK assets, especially if I’m there.

    But would that be true if you weren’t a UK citizen, for example? What about cash in a bank? I think they can seize money that’s in any bank.

  154. I think we are talking past each other, Jessica. After today, though, you’re on your own. What does it even matter, anymore?

  155. >I consider hyperinflation to be vastly more probable than sovereign default.

    Hyperinflation is a kind of sovereign default. Of course, the true default began in the Nixon administration, when inflation of the fiat money exceeded the ability of the Fed to pretend it had enough gold to satisfy redemption demands. It’s nothing short of absurd that the rest of the world let us get away with that.

  156. # Satanam in computatrum Says:
    > After today, though, you’re on your own. What does it even matter, anymore?

    Oh I don’t agree (and I am assuming your are referring to the horrific events in the House Of Representatives last night.) What we have is an interesting situation. A government that has over reached its mandate, and a population that is furious, and ready with the pitchforks and torches. I’d suggest this is a great time for new ideas and different approaches to old problems. This is one of those rare times when dramatic change is possible, because the population are so pissed. I am not saying it will happen, or even that it has a high likelihood of happening, what I am saying is that this is one of those rare times in politics where dramatic change actually is possible.

    But that is just my opinion.

  157. >> Besides, there’s the jurisdictional problem – a US court can’t get my UK assets, especially if I’m there.

    > But would that be true if you weren’t a UK citizen, for example? What about cash in a bank? I think they can seize money that’s in any bank.

    Why do you think that? AFAIK, the US doesn’t honor such requests.

    If the UK does honor such requests (and I don’t know either way), substitute some country that doesn’t.

  158. Why do you think that? AFAIK, the US doesn’t honor such requests.

    If the UK does honor such requests (and I don’t know either way), substitute some country that doesn’t.

    Two words: antiterrorism law.

    I’m pretty sure that the U.S. will gladly freeze the American assets of foreign nationals if they are suspected terrorists. And the definition of who is a terrorist is conveniently arbitrary: two-thirds of all PATRIOT Act invocations have been in drug cases unrelated to Al-Qaeda or other international terrorism.

  159. > I’m pretty sure that the U.S. will gladly freeze the American assets of foreign nationals if they are suspected terrorists.

    True, but irrelevant. Violating a contract has nothing to do with terrorism suspicions.

    In addition, frozen assets aren’t given to third parties.

  160. The way the gov may administer SS and medicare may be quite poor. That said, most who think they don’t need a safety net are just not considering the possibilities. Many that read your blog, including myself, may have significant savings and/or a good job. A catestrophic event, however unlikey, could befall anyone in this readership such that they can no longer work and may have bills that exceed their insurance caps, etc. There is a fine line between being in the category that is comfortable /w insurance / savings and being in the category that needs the safety net.

    I am in the top 1% of earners, but yet I believe it is a moral imperative to provide a safety net, if not for the possibility that many of us have a chance of falling out of our comfortable segment into a position of need.

    The US is definitely in deep sh*t. But consider that our last idiot president ran a surplus into a huge deficit. Let us also consider that the 2010 budget for the military is 17%, exactly the same % as SS. Medicare/caid is 23%, interest on debt 10%, and 32% other.

    How is it that Germany and France provide an excellent safety net that far exceeds ours in social benefits and yet is running lower in terms of debt. It is time to get out of the world policing game and focus on our own problems. The US is so close to failure not just on economic terms but in terms of the future of its citizens (witness our educational standing).

  161. Jonathan Shore Says:
    > but yet I believe it is a moral imperative to provide a safety net,

    I agree that there is a moral imperative to provide a safety net. I imagine most libertarians would too (though I will grant you there is a group who are anti-charity.) However, the question is, how should that be provided? Medicare and social security are not safety nets. They are large, centralized programs designed to provide almost everyone pensions and medical care. They are the very “government takeover of health care” that all the pundits are ironically talking about. Medicaid is certainly closer to a safety net, but it is so badly run, it is frightening. Most of the safety net for medical care is provided privately in our country, by laws that require all hospitals to provide emergency care regardless of ability to pay.

    The bottom line from the point of view of a libertarian like myself is this: governments do things badly, competitive markets generally do things well. How can we provide societal goods using the latter rather than the former? In this case the answer throughout history has been private charity. This has been destroyed, or turned into a legally enforced obligation by the regulatory state.

    If you truly believe it is a moral imperative to help those less fortunate than yourself, I suggest that their advocates convince people of this, and have them voluntarily part with their money, rather than using the enforcers at the IRS to do their dirty work for them. One need only look at the outpouring of help for the people of Haiti to see that Americans are compassionate and charitable to a fault, even with the scraps our federal government decides to leave in our paychecks.

    If you can’t handle private charity as an approach to this, then at the very least lets make the government provided safety net just that: a safety net. At the moment it is a comprehensive package for all your financial needs after the age of 65. The result is a breathtakingly poorly run system, dependency of our seniors, and brutal taxes on our young people.

    All this talk of evil medical insurance companies misses one important point: the US Government is the largest insurance company in the world, it is the one that is hardest to deal with, and the one that denies the most claims (per capita.) It is so bad that there is a thriving industry of add on insurance and advocates to help you deal with their baloney. How ironic is that? They are the worst insurance company, and somehow we think that turning all our business over to them (or their bureaucratic ministrations) is somehow an improvement. I don’t think so. The less we have to entrust to the bozos in DC the better off we are.

  162. The Clinton “surplus” was a temporary bump in revenue from tax on capital gains during the internet bubble. When the internet bubble burst the revenue went away. There too went the surplus.

    I agree that we need to rethink our foreign policy now that the cold war is over. We’ve been the West’s strategic reserve since 1918. We’ve furnished most of the front line troops since 1941. I think the strain is showing. We’ve put off a number of crucial domestic policy debates, such as the nature and size of our social safety net, to maintain solidarity against the Soviets.

    On the other hand, I think we need to pare back the domestic side. SS and Medicare/Medicaid are clearly unsustainable.

  163. >Let us also consider that the 2010 budget for the military is 17%, exactly the same % as SS. Medicare/caid is 23%, interest on debt 10%, and 32% other.

    The thing is, the military budget is not expanding at near-exponential rates. It’s more or less constant, and in fact if it will move will probably go down in the near future, as we deal with Afghanistan and Iraq more permanently. Whereas our entitlements obligations have nowhere to go but up.

  164. Jonathan Shore Says:
    > but yet I believe it is a moral imperative to provide a safety net,

    Fair enough.

    (1) How much are you personally willing to provide for said safety net?
    (2) How much are you current providing?
    (3) Suppose that someone is providing less than you think that they should – in what circumstances are you willing to use force to extract the difference?

    According to Obama’s AG, there’s at least $150B/year of Medicare fraud, and his estimate is on the low end of the range of credible estimates. That is significantly higher than profit and overhead in the entire private health care system, which serves more people. We haven’t counted Medicare overhead or the fraud and overhead in other public programs.

    That >$150B/year is money that has been forcibly extracted for the “safety net” that doesn’t go to the safety net. It is money that folks can’t spend to provide for their own care. In at least some cases, taking that money from them forces them to rely on the safety net. In other cases, it is money that would have gone towards employing folks so they wouldn’t need the safety net.

    Since that level of fraud seems unavoidable, please tell us how to design a safety net that makes economic and moral sense. (If you assert that the fraud is avoidable, you can use the money to provide the safety net, but we’re going to reduce taxes accordingly.)

  165. @Jessica and others: In theory charity could work, but I don’t see it happening. Why are there 10s of thousands that die each year due to lack of medical access in the US. Why are medical bills the #1 cause of bankruptcy. Would you want to put your life on the line in the hope that maybe some charity would cover your medical costs should you get a catastrophic desease and no longer be able to work? Where is the charity organisation for these people?

    I was in the banking industry and still trade the markets with my own firm. I *know* what capitalism is about and it is generally not altruistic. The commercial sector will not regulate itself (witness banks, oil, utilities, phone companies, cable, etc). The system is after the short-term dollar and willing to do anything within the “rules” regardless of the ethics.

    If you are concerned about your taxes, what is the chance that you would contribute something significant to a private body that would fill the following voids:

    - healthcare for those that cannot afford it (and this can happen to most of us unexpectedly, with low probability)
    - income to supplement the post retirement years for those that were not able to save enough

    @Andy I have no issue with having private parties administer healthcare payouts / insurance, as long as there is a scheme that provides said insurance to all citizens, amortizing the cost across the whole population. Get rid of Medicare / caid and have the government provide the monies to 3rd parties for administration. The problem is that the elderly generally want to hold on to Medicare. Getting rid of it and replacing would be a tough sell. But I am all for it.

    Final note. I’ve lived in Tokyo and London for a total of 10 years between them. Both of these countries have a well developed social system. My level of care in Japan and the UK was similar to what I receive here, except it cost very little. In fact many more things were covered for free or for nominal fee than were covered on my expensive bank sponsored health insurance package. I’ve seen it working.

    If it doesn’t or can’t work in the US, what does that say about us?

  166. Jessica Barker Says:

    > The bottom line from the point of view of a libertarian like myself is this: governments do things badly, competitive markets generally do things well

    Governments *do* do things badly, much in the way a monopoly will tend to offer relatively poor quality products or services. However, there is a class of services or products that cannot be handled competitively by the commercial system.

    With most products there is this notion of “opt-in”. I can chose not to buy a bentley and instead buy a ford. By so doing I have satisfied a requirement I have to live, but at a price I can afford. I am also implicitly keeping the price of bentley’s somewhat lower by keeping the demand for them down.

    My utilities (where I live) are not an example of opt-in. I have no choice for gas or electricity. Short of moving geographically, I am locked in to whatever rates they charge. There was a time when there was more regulation and the utilities could not raise rates beyond a reasonable measure. Now it is out of control. My electric / gas bill was > $1000 for the coldest month. Unfathomable.

    Back to healthcare, again there is little about this that is opt-in. If you need heart surgery, aspirin is not going to do. One cannot generally chose to do the affordable thing, on risk of death.

    I am going to argue that “opt-in” allows the capitalist system to set prices and that the non-opt-in category of services is where we need a central body to regulate and try to amortize the impact of low-probability but nevertheless probable events.

    If one understands that one’s self-sufficiency could be at risk with a catastrophic health event (unless you have saved millions), you have to see that you need an external body available to provide such protection. There are events that can easily exceed the caps placed on most insurance policies.

  167. >My level of care in Japan and the UK was similar to what I receive here, except it cost very little.

    It didn’t cost very little, it cost you very little. There’s a difference. You got your expenses carried by someone else who had no choice in the matter.

  168. # Jonathan Shore Says:
    > In theory charity could work, but I don’t see it happening.

    The government has co-opted many charitable functions, called them entitlements, and destroyed the environment for charity. So, no wonder you don’t see it work. However, take a look at Haiti, of any other natural disaster to see the disposition of the American people to those in need.

    > Why are there 10s of thousands that die each year due to lack of medical access
    > in the US. Why are medical bills the #1 cause of bankruptcy. Would you want to
    > put your life on the line in the hope that maybe some charity would cover your
    > medical costs should you get a catastrophic desease and no longer be able to
    > work?

    The medical industry is one of the most highly regulated industries in the world. I have argued elsewhere that medical care probably costs about 10 to 100 times as much as it should because of this. That is the primary cause of the issues you raise here, not lack of charity. Nonethless, even if you advocate government sponsored charity, go ahead. But lets get all the non charity cases off the roles. Lets give them back the money we took from them and let them but their own medical care.

    > Where is the charity organisation for these people?

    The government has co-opted this business, so they are much rarer. However, in the past, charity hospitals and doctors giving services either for free or for in-kind exchange was very common.

    > I *know* what capitalism is about and it is generally not altruistic.

    I refer you to Adam Smith:

    “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”

    Capitalism buys us the wealth to be altruistic.

    > The commercial sector will not regulate itself

    The commercial sector is regulated by the free market, not by itself.

    > If you are concerned about your taxes, what is the chance that you would
    > contribute something significant to a private body that would fill the
    > following voids:

    Exactly excessive taxation robs the truly needy of charity. It is a great bait and switch. Kill the ability of private individuals to provide charity. Government provides charity. People depend on government. Government grows more powerful. Nice work if you can get it.

  169. Jessica Barker Says:
    (You got the wrong type of dog there buddy.)

    > However, there is a class of services or products that cannot be handled competitively by the commercial system.

    I agree, though I imagine Eric would disagree. However, I think you probably have a rather broader idea of what these non competitive services are than I do.

    > My utilities (where I live) are not an example of opt-in.

    Because the local government prevents others from competing.

    > Now it is out of control. My electric / gas bill was > $1000 for the coldest month. Unfathomable.

    Gosh, imagine all the innovative alternatives that could be offered to you for $1000 a month, if only the government didn’t regulate this industry so harshly.

    > Back to healthcare, again there is little about this that is opt-in. If you need
    > heart surgery, aspirin is not going to do. One cannot generally chose to do
    > the affordable thing, on risk of death.

    But there is a lot more the heart surgery than heart surgery. The medical industry from surgeons to sutchers is one of the most heavily regulated in the world. This heavy burden of regulation causes a massive increase in the cost of medical care. Of course proper safety precautions have to be taken with all medical issues, but these could readily be provided competitively. If you will forgive me I will switch the specifics of the example you gave to one I know specific costs on.

    Lets say you had cancer, and had to have an operation to remove various tumors all over your body. In a hospital that will cost about $50,000 depending on the nature of the operation. However, if your dog had exactly the same problem and exactly the same operation, it would cost probably $500 to $1000. What is the difference? Do people not love their dogs?

    Further, vast amounts of healthcare costs have nothing to do with these sorts of operations. They have to do with “doctor my elbow hurts”, “nurse, little Johnny needs his DTaP shot.” These things are vastly overpriced because people don’t actually pay for them. In areas where people do pay for their own medical care, for example Laser eye surgery, or plastic surgery, competition in prices drives the cost down and pushes the quality up. Today, one can get bigger boobies, that look and bounce better and are less toxic for much less money than your mommy could. Now that is what I call progress!

    > If one understands that one’s self-sufficiency could be at risk with
    > a catastrophic health event (unless you have saved millions),
    > you have to see that you need an external body available to provide
    > such protection.

    Yes, there is a word for that, it is called “insurance.” However, we have confused the meaning of insurance to mean: insurance with minor out of pocket pre payment plan, and medical billing service fee. No wonder it is so screwed up.

  170. esr says:

    > It didn’t cost very little, it cost you very little. There’s a difference. You got your expenses carried by someone else who had no choice in the matter.

    I don’t follow. I paid taxes in the top tax brackets in both the UK and Japan. I *did* pay for the care through the taxes but also helped amortize the cost of the lower-probability events or expenses for lower-income folks. I have no problem with this. The distance between being wealthy and not is a series of major events.

  171. Jessica Boxer wrote:
    >nurse, little Johnny needs his DTaP shot.”

    You know this reminded me of another specific example. For many years vaccinations contained a substance called thimerosal. It is an antiseptic and anti fungal agent, which contains a tiny amount of Mercury. It is used in vials of multi dose vaccines, so that the small possibility of infectious agents penetrating the latex membrane of the vial from multiple needle insertions is eliminated.

    There was a moral panic claiming that thimerosal, because of the mercury content was implicated in autism. Of course there was not the slightest scientific evidence in support of such a claim, but “the internet” said it was true so it was true. Consequently, today, pretty much all vaccines for children are now thimerosal free, and are consequently only come in single dose vials. This greatly increases the cost of each shot. However, since parents do not, in general, pay for the shots their kids get, there is no down side to this for parents. Why take even the non existent risk of autism if it doesn’t cost you any more not to? What about doctors?I guarantee that nearly every pediatrician in America has been sued over this non existent risk if they use multi dose shots, so, although they know it is bogus, they choose non thimerosal vaccines, because it doesn’t cost them any more, and it reduces the risk of lawsuit. What about insurance companies? Do they really want to be sued? Do they really want to be the big bad company putting kids at risk to save a buck, even though the risk is non existent?

    So, because consumers don’t pay the cost of this moral vanity, everyone pays more. Why the heck shouldn’t parents just pay for little Johnny’s shots? Often because the state requires insurance companies to cover it for free. Politicians — protecting our kids from the evil drug companies. Nice…

    BTW, during flu season, when you go to Walgreens and get your flu shot for $19.95 (plus a free candy bar), the shot contains thimerosal. Little Johnny’s shot at the pediatrician probably costs the insurance company ten times as much, and all he gets is a free Batman sticker.

    However, don’t worry, Nancy Pelosi will run the whole show much better and cheaper.

  172. Jessica Boxer (or Adam Smith) writes:

    > “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”

    Where is the incentive in a system where there is no opt-in. If meat becomes too expensive I can choose to eat beans. Most health care is not optional. We know from history that monopolies *do* work in their self interest and that interest is not in the public’s general interest. Health care of course is not a monopoly, but is very similar in that there is little economic pressure to drive prices lower. There is no choice!

  173. Jessica writes:

    > This heavy burden of regulation causes a massive increase in the cost of medical care.

    Perhaps you refer to the regulation around the testing and release of new drugs and procedures? Surely most of this is a good thing (though I’m sure the gov function could be leaner). My father is a medical researcher specializing in biostatistics and he would tell you that there is a lot of cut corners in studies, both in terms of how trials are set up and in terms of the statistical evidence used. Having a body without a profit motive that scrutinizes research before it becomes a product or procedure is very important.

    I spent some time in a hospital 18 years ago in NYC. As it happened I did not have insurance at the time and got to see the charge-out (what u see from insurance is already negotiated down). My meals at the hospital were charged at $90 / meal (and that was 18 years ago). I can’t see where regulation would come into the picture for my meals.

    There are real costs that doctors carry such as insurance, etc. However, the system has run amok because it can. There is really little in the way of market force to keep prices in check.

  174. Jessica wrote:

    > Because the local government prevents others from competing.

    This was written in regard to utilities. Not so, there are some areas with multiple providers. The problem with utilities and other infrastructure-heavy businesses, is that it is too costly and not at all practical to have separate infrastructure. Imagine 2 different gas companies with two sets of gas pipes into the local neighborhood. To allow another competitor would require a sharing of the pipes that the other owns and maintains. You can guess that if purely market run, the owner of the infrastructure would not see it beneficial to prove infrastructure access at cost, rather would price in a way to ensure its monopoly is kept.

    Healthcare is a different situation, but similar in that it likewise does not respond evenly to market forces.

  175. Jonathan Shore Says:
    > Most health care is not optional.

    Food is also not optional.

  176. Jonathan Shore Says:
    > Perhaps you refer to the regulation around the testing and release of new drugs and procedures?

    Amongst other things. I gave an example of what I was talking about in regards to thimerosal, and cancer operations. I suggest you consider my example of the human operation verses the dog operation. Why does the latter cost 1% of the former?

  177. Jonathan Shore Says:
    > Imagine 2 different gas companies with two sets of gas pipes into the local neighborhood.

    What specifically do you foresee as the problem with this? Are you arguing that it is too expensive, to low quality, to subject to risk? What exactly is your concern? Not that I am advocating two sets of gas pipes necessarily. I am advocating innovation to determine the best way to deliver your needs whether energy or some other good. Monopolistic pseudo government organizations like utilities profoundly hamper such innovation.

  178. Jessica Boxer Says:

    > I suggest you consider my example of the human operation verses the dog operation. Why does the latter cost 1% of the former?

    Why does it? Medical malpratice insurance is a very small % of cost. Perhaps vet services are more of an opt-in type service. I know that many would not consider paying even the 1% and would just euthanize. Surely you can;t claim that the 100x price difference is due to gov regulation. I submit that a large % of it exists because we don’t opt-out and therefore there is nothing economic to keep the costs in line.

  179. Jessica Boxer writes:

    > What specifically do you foresee as the problem with this? Are you arguing that it is too expensive, to low quality, to subject to risk? What exactly is your concern? Not that I am advocating two sets of gas pipes necessarily.

    How much street real-estate are you going to dedicate to the 30 possible providers of gas. How are you going to switch from one provider to another and what would be the cost in the switch. Are they going to have 30 possible valves under the street for each house? Infrastructure of this sort is only marginally fungable.

    @everyone: competition / capitalism appears to be the best solution when it is possible (for reasons Adam Smith indicated). HOWEVER, there are clearly services, such as infrastructure, healthcare, and possibly other services where the necessary components of price adjustment are missing. Without a regulating entity, the best interests of such services will be to maximize price and profit — because they CAN.

  180. > Yes, there is a word for that, it is called “insurance.” However, we have confused the meaning of insurance to mean: insurance with minor out of pocket pre payment plan, and medical billing service fee. No wonder it is so screwed up.

    Health insurance is significantly different from a standard insurance: a qualifying event significantly changes the probability of further qualifying events. Therefore you need to choose the company essentially for life. You only need to consider the possibility of it going bankrupt to see that the free market might easily leave you in a very unhappy state in such a situation.

  181. > Why are medical bills the #1 cause of bankruptcy.

    They aren’t.

    When you’re sick enough to run up significant medical bills, you typically can’t work. Or your family can’t work.

    Medical insurance doesn’t replace income.

    And then there’s the folks whose bankruptcy is due to addiction. Using medical means to treat addiction doesn’t mean that an addict’s bankruptcy is due to medical bills.

  182. > healthcare for those that cannot afford it (and this can happen to most of us unexpectedly, with low probability)

    The US has provided free healthcare for years, in several ways. (And no, the uninsured don’t use emergency rooms more than other people. And yes, they can get ordinary care outside of the emergency room. It’s called the county hospital in most places.)

    If you’re unaware of this care, you don’t know enough about the US healthcare system.

    If you want to argue that this care is inadequate, great. Let’s talk.

    How much are you willing to pay for other people’s medical care? More to the point, how much did you voluntarily pay last year for said care? (There’s no shortage of medical charities that deliver a lot of care for not much money. They do so far more efficiently than the private systems, let alone the public ones.)

  183. > > Why are there 10s of thousands that die each year due to lack of medical access
    > in the US.

    Bzzt – thanks for playing, but you’re wrong.

    > @Andy I have no issue with having private parties administer healthcare payouts / insurance, as long as there is a scheme that provides said insurance to all citizens, amortizing the cost across the whole population.

    You don’t get off that easily. You supported the exact opposite. You supported a system that will deliver less care and more expensively.

    I do hope that you’re young, so you can subsidize others for a long time. When your turn comes, you may find that future generations aren’t willing to return the favor.

    Most young people have figured out that SS is a disaster for them. Guess what – govt healthcare is the same thing, only moreso.

  184. I don’t see anything here that contradicts my thesis:

    - healthcare is one of a number of services that does not have the price adjustment mechanism necessary to make it work in the private sector. Like all most commercial enterprises healthcare providers try to maximize profit. There is little or no mechanism to drive down prices when they become too large. I do not advocate that healthcare should be gov run, rather that there needs to be a body (ie gov) that through one mechanism or another sets standards on cost growth.

    - I’ve had an experience with being in the hospital uninsured right after college. My bills were in the 10s of thousands. Where was the charity or organisation that was going to pay those for me? It took me 2 years to negotiate the bills down to about 50% (what the insurance companies negotiate to BTW). So my 90$ hospital meals went down to $45 and the $300 / day bed to $150, etc. Obviously I have insurance now and also have a significant amount of money. That said, the catastrophic could still happen. My insurance only covers to a $1m cap.

    - if the “county hospital” approach was so good why are we having this discussion and why was I not transferred to one when I had no insurance. In the NYC area I am not aware of any such service. And I do know for a fact that many use the emergency room in lieu of visits to the doctors office because doctors won’t take them. I have family in the medical profession in the NYC area.

  185. > healthcare is one of a number of services that does not have the price adjustment mechanism necessary to make it work in the private sector

    What are you babbling about? There can be alternative treatments, alternative providers, and so on.

    > My bills were in the 10s of thousands.

    And you could have had the services provided by charities. Lots of folks do.

    Or, you could have lived with a chronic condition. Again – lots of folks do.

    > if the “county hospital” approach was so good why are we having this discussion and why was I not transferred to one when I had no insurance.

    I didn’t say that it was good. In addition, the folks involved have no obligation to inform you of cheaper alternatives. (How many of the vendors that you currently patronize have ever told you “you could get this cheaper somewhere else”?)

    Since you’re going to leap on “good”, I’ll ask – do you think that the “health care right” has any limits? Suppose that you’ll die without $100B in care – is someone obligated to provide it? (In a finite world, spending that $100B on you means that it isn’t available to spend on something else so even if you think that there’s an obligation, there’s no way to satisfy it.)

    I note that much of the difference between health care costs in the US and Europe is due to end-of-life costs – we spend far more money in the last few months. In other words, the European system is to deny care….

    We also spend a lot of money on premature babies who are very unlikely to survive. The number that do is too small to be statistically significant while the money that we spend is. Again – Europe denies care.

    As much as you’d like otherwise, the argument really is over what care. “needed” simply isn’t an option.

    > And I do know for a fact that many use the emergency room in lieu of visits to the doctors office because doctors won’t take them.

    And many with insurance go because it’s more convenient. The study has been done in Mass – the insured and uninsured use emergency rooms the same way. Anecdote is not the singular of data.

    Besides – free emergency room care is free health care. Complaining about the former proves that the latter exists. Since you claimed that it didn’t….

  186. I note that Shore still seems to believe that healthcare should be provided to others.

    He’s told us “I am in the top 1% of earners, but yet I believe it is a moral imperative to provide a safety net”.

    Great. I want to learn more about this “moral imperative”. However, I guess that he didn’t see my questions, so I’ll ask again:

    How much are you/Shore willing to pay for other people’s medical care? More to the point, how much did you/Shore voluntarily pay last year for said care?

    Note that there’s no “free rider” problem here. The recipients of Shore’s generosity would be folks who aren’t in a position to help provide a safety net for others.

    I’d like to be a better person and Shore has told us that this is a

  187. Jonathan Shore Says:
    > Why does it?

    It is caused by a lot of different things. However, the bottom line reason why health care costs probably between 10 and 100 times as much as it should or could is because there are practically no constraints on price. There is an attitude that no expense should be spared when it comes to health care. This attitude only exists because the users of health care don’t pay for it, it is almost always paid by a third party.

    I think I offered a very clear example of how this works this in the case of childhood vaccinations.

    Let me say it again though, I am convinced that health care costs one or two orders of magnitude more than it should. That is the difference between a major financial burden and a minor incidental cost.

    The solution is actually relatively straightforward. In the United States there is a type of medical insurance with very high deductibles, and a tax deferred savings plan called a medical savings account. In this type of insurance the patient pays the day to day health care costs, and has a tax deferred savings plan to facilitate this. However, when a major medical event happens in their life they have insurance to pay for that. If this were a common type of insurance plan medical care would be dramatically transformed for the better in the United States. However, everything in our culture, institutions and government policy pushes people away from such plans. Why should I pay for my minor medical expenses when this employer over here offers me a medical insurance plan that pays for everything? The tax system is set up in such a way as to encourage this choice. And these plans are consequently quite unpopular.

  188. Jonathan Shore Says:
    > How much street real-estate are you going to dedicate to the
    > 30 possible providers of gas. How are you going to switch from
    > one provider to another and what would be the cost in the switch.
    > Are they going to have 30 possible valves under the street for
    > each house? Infrastructure of this sort is only marginally fungable.

    When I read sentences like this I think of the Politburo. To be clear, I am not accusing you of being a communist, I am sure you are a good honest American capitalistic democrat. However, these are exactly the sort of discussions that the communist system had huge problems with. How to allocate resources throughout the economy to produce the desired goals. The problem here is the lack of private property. If the streets were not a public commons none of these problems would be an issue. They would be a matter of bilateral negotiation, easements and rights of way. All of which are very simple, well defined parts of common law.

    Perhaps, for example, the solution is to not use gas at all, since it is a pain to distribute? Perhaps the solution is to pump the gas into a tank in your back yard. Perhaps the solution is to share a gas pipeline and work out a mechanism to do so fairly. Perhaps the solution is to configure the streets in such a way that it is easy to add new utility conduits without tearing up the streets. There are millions of innovative solutions to the problems you outline, and if innovation was rewarded these solutions would be produced naturally, without the need for bumbling bureaucrats at city hall trying to juggle fifty balls in the air, while trying to buck for contributions for their re-election campaign, and a cushy job for their uncle.

    The problem here is a lack of private property with well defined property rights, and thinking that somehow central planning can solve the problem. You have already indicated the consequences: your $1,000 monthly heating bill. As I said before, $1,000 a month is a lot of money, and there are a lot of innovative people who would be happy to take one quarter of that from you and your neighbors by solving your problems. Shame the government won’t let them.

  189. Which reminds me – women consume more healthcare. Their lifetime costs are higher, even ignoring pregnancy.

    Should they pay more?

    Note that a lot of healthcare is things that don’t actually extend lifespan. Is that the sort of thing that comes under Shore’s “moral imperative”? If so, does that imply that there’s a “moral imperative” to provide other things that make people’s lives better? If it doesn’t, why is improving someone’s life with healthcare different from improving their life in other ways?

    Like I wrote – I’m eager to learn how to get all these things right and Shore claims to know how.

  190. > Perhaps, for example, the solution is to not use gas at all, since it is a pain to distribute? Perhaps the solution is to pump the gas into a tank in your back yard.

    Shore claims some familiarity with NYC.

    It’s reasonably common for folks on that coast to have oil or coal furnaces.

    Yet, his specific complaint about heating costs only makes sense if you assume that heating must be provided by piped natural gas or electricity.

    Curious.

    Note that “central delivery” does not imply single supplier.

  191. Jonathan Shore Says:
    > 90$ hospital meals went down to $45 and the $300 / day bed to $150, etc.

    See, here Jonathan you illustrate perfectly what I am talking about. You spent $90 on a meal? Why didn’t you get your Mom to bring you a sandwich? You spent $300 a day on a bed? Do you accept that competition could readily reduce this sort of cost? You also probably bought paper tissues for $15 a box, and aspirin for $3 a pill. But, had your insurance company picked up the cost, most likely you would not even have looked at your bill. (Well, being the frugal wise person you are, you probably would, but most people don’t.) Even without talking about the cost of actual medical care these sorts of things drive the cost out of control. It is baloney, but it is the way the system is set up, because, as I say, almost nobody actually pays for their medical expenses, and consequently, almost nobody cares what they are.

  192. > healthcare is one of a number of services that does not have the price adjustment mechanism necessary to make it work in the private sector

    That turns out not to be the case. Real medical services not covered by healthcare plans, such as LASIK, have improved quality dramatically while the prices are now around 1/3 what I paid in 1996.

  193. Did any of the people making commentary about health care do John Cowan’s homework assignment and read Kenneth Arrow’s 1963 paper on the issue first?

  194. # Jeff Read Says:
    > Did any of the people making commentary about health care do
    > John Cowan’s homework assignment and read Kenneth Arrow’s 1963
    > paper on the issue first?

    This is a classic tactic used in these sorts of discussions. “I disagree with you, and to prove it please read this really long research paper offline. Until you have done that, you don’t know what you are talking about.” If the research paper has something substantial to say, make your comment, present the argument, put forward the case. Otherwise it is just a vacuous appeal to authority.

  195. > This is a classic tactic used in these sorts of discussions. “I disagree with you, and to prove it please read this really long research paper offline. Until you have done that, you don’t know what you are talking about.” … it is just a vacuous appeal to authority.

    Not only that, but you often find that the person making the demand will misrepresent its contents in ways that suggest that he hasn’t read it.

    Today’s fact – Republican Congresscritters voted overwhelmingly for Social Security when it was first passed during FDR’s time.

  196. This is a classic tactic used in these sorts of discussions. “I disagree with you, and to prove it please read this really long research paper offline. Until you have done that, you don’t know what you are talking about.”

    It’s not a “classic tactic”, it’s the basis of all meaningful debate. If you don’t know what you are talking about, then you have nothing meaningful to contribute.

    As to the paper, Arrow basically makes the point that due to a variety of reasons (information asymmetry between doctor and patient, the fact that the patient’s demand for health care is largely outside the patient’s control, our expectations of doctors as regards competence and moral standards; etc.) the standard competitive economic model can’t be applied to health care and health insurance.

    I welcome free-market-based ideas for health care which take these into account. People who make arguments that ignore these market failures, however, don’t know what they’re talking about and don’t contribute anything meaningful to the health-care debate.

    Hence why John asked you to read the paper before saying anything. It’s nine pages; it’s not too bad.

  197. > a variety of reasons

    Oh goody.

    > information asymmetry between doctor and patient

    While there may be information asymmetry, it isn’t necessary that there be asymmetry. And, even if there is asymmetry, it isn’t necessarily relevant. (Note that de facto information asymmetry is present in a number of areas where we think that the standard competitive model applies.)

    > the fact that the patient’s demand for health care is largely outside the patient’s control

    That’s not a fact. It’s actually false. More to the pont, the way in which that demand can be satisfied is often very much under the patient’s control. Example – glasses vs lasik.

    > our expectations of doctors as regards competence and moral standards

    More details needed to see why that’s different between the markets for TVs, food, and health care, especially the latter two.

    Note that listting some “facts” and asserting a conclusion that doesn’t necessarily follow isn’t an argument, even if you attribute the proof to an “authority”.

  198. # Jeff Read Says:
    > It’s not a “classic tactic”, it’s the basis of all meaningful debate.
    > If you don’t know what you are talking about, then you have nothing
    > meaningful to contribute.

    If you think that someone has nothing meaningful to contribute because they have not read one specific paper out of of the millions of papers written on health care, you are sadly mistaken. It is, as I say, a tactic to take the burden of you to make your case with a jejune appeal to authority.

    > As to the paper, Arrow basically makes the point that due to a
    > variety of reasons (information asymmetry between doctor and
    > patient, the fact that the patient’s demand for health care is largely
    > outside the patient’s control, our expectations of doctors as regards
    > competence and moral standards; etc.) the standard competitive
    > economic model can’t be applied to health care and health insurance.

    Due to asymmetry between the car mechanic and car owner, and the fact that demand for car repairs is largely outside the drivers’ control, obviously the standard competitive model can’t be applied to car repair shops.

    Due to the asymmetry between the web programmer and the business owner, and the fact that businesses these days absolutely have to have a web site to succeed, obviously the standard competitive model can’t be applied to web design firms.

    Due to the asymmetry between massive corporations like Safeway, and the mom doing her grocery shopping, and the fact that we all need to eat, obviously the standard competitive model can’t be applied to grocery stores.

    Due to the asymmetry between Realtor and house buyers, and the fact that we all need a roof over our head, obviously the standard competitive model can’t be applied to house buying.

    Due to that asymmetry between employers and employees, and the fact that we all need a job, obviously the standard competitive model can’t be applied to job hunting the the process of hiring employees.

    Due to the asymmetry between our lungs and our brains, and the fact that we all need to breathe, obviously we need government intervention to help us consume oxygen and expel carbon dioxide. (EPA, please take note, those evil humans are polluting the atmosphere.)

    If only the medical system over charged us as little as the car mechanics do. We would all be a lot better off.

  199. Jeff Read writes:
    > Central planning solves these kinds of problems all the time.

    If I am not mistaken the spaghetti of wires is located on a publicly owned street. Are you familiar with “the tragedy of the commons”?

  200. > In this type of insurance the patient pays the day to day health care costs, and has a tax deferred savings plan to facilitate this. However, when a major medical event happens in their life they have insurance to pay for that.

    In this scenario, what happens to the patient if their insurance company goes bust and they have another major medical event?

  201. # Ajax Says:
    > In this scenario, what happens to the patient if their insurance company
    > goes bust and they have another major medical event?

    I suppose it depends on the specifics. They may be able to switch, though it is probably going to be expensive, their policy might get sold on. They might have to depend on the charity of friends, family or community.

    What happens to Medicare and Medicaid when the government goes bust?

  202. > I suppose it depends on the specifics. They may be able to switch, though it is probably going to be expensive, their policy might get sold on. They might have to depend on the charity of friends, family or community.

    In other words, it’s quite possible a person would be doomed, despite being prudent and paying the premiums regularly. Don’t you think that a system allowing for such situations much more often than other alternatives might not necessarily be the best choice?

    > What happens to Medicare and Medicaid when the government goes bust?

    Good question. But the event of the US government going bust would probably cause way more significant problems.

  203. Ajax Says:
    > In other words, it’s quite possible a person would be doomed,
    > despite being prudent and paying the premiums regularly.

    And that is different from the rest of life exactly how? Insurance has been a very reliable mechanism for securing against risk for much of modern human history. It has been historically VERY rare for insurance companies to go bust, and premium insurance companies even more rarely. Need I say the obvious? I suppose I should. Countries go bust, default of debts and public obligations, get transformed by revolution, and so forth at a far higher rate than large, triple A rated insurance companies go bust.

    Life is full of risks, all we can do is attempt to reduce and provide for those risks. They don’t go away complete.

    > Don’t you think that a system allowing for such situations much
    > more often than other alternatives might not necessarily be the best choice?

    Much more often? Really? Can you back up that claim?

  204. Govt’s don’t have to go bust – they can simply decide that they don’t want to pay what they “promised”.

    Several years ago, the US govt changed the tax treatment of social security payments, which effectively and significantly reduced them. The changes in retirement age did the same thing.

    I’ve yet to run into a young person who believes that the US govt will keep its promises wrt their SS. Why should they believe that healthcare will be any different?

    Note that I can diversify savings that I own, reducing the likelyhood of a catestrophic event. How do I diversify my “govt” exposure?

    I’ve asked this question before. The only answer offered has been “you’re responsible for keeping your govt solvent”.

  205. > There are events that can easily exceed the caps placed on most insurance policies.

    Suppose there is a life-saving procedure that costs $100 million. Do you think the government is going to pay for this?

  206. # Andy Freeman Says:
    > “you’re responsible for keeping your govt solvent”.

    What, you personally Andy? Well stop messing around here, you need to get back to work, make some money, to support me in my retirement. (Jessica is pulling all her money out of her 401k to spend on a fancy vacation. Due to Andy’s generosity, it looks like I don’t need to save for retirement. Thanks Andy!)

  207. “At some point not too long after that, the bond markets (and by that I mean China and Japan) will stop playing. Game over.”

    And where would they park their money? Europe and its Greek fiasco? Latin America and its clockwork defaults? For all our foibles, the USA is still the best home for capital. Remember that this game isn’t just about economics. Its political too. If China chooses to not buy our debt, it risks an upward move in their currency, which is a huge liability for an export oriented economy looking to add jobs. Japan is in a different boat from China but as an Asian exporter it too sees the same pressure to buy US debt.

  208. > > Don’t you think that a system allowing for such situations much
    > > more often than other alternatives might not necessarily be the best choice?

    > Much more often? Really? Can you back up that claim?

    The situation of health care in US is much closer to the free market solution than the situation in France. I find it quite likely that the number of bankruptcies in US due to medical care bills is much larger than the one in France.

    Wrt. the point about bankruptcies of insurance companies being unlikely. I gave bankruptcy as the simplest example of how the free market can fail you. More likely situation – suppose you have a chronic sickness and lose your job, together with ability to pay the premiums. The market has all the incentives to eliminate your insurance and never to provide it back at reasonable cost. Why do you think it would work?

  209. > Note that I can diversify savings that I own, reducing the likelyhood of a catestrophic event. How do I diversify my “govt” exposure?

    Learn foreign languages.

  210. > I find it quite likely that the number of bankruptcies in US due to medical care bills is much larger than the one in France.

    I wondered when the medical bankruptcy myth would pop up.

    One of the things that happens when people get seriously sick is that they stop working. As a result, most of them lose their income. However, they still have their ordinary expenses, housing, energy, food, etc.

    Even with free medical care, they’d go bankrupt.

    And then there’s the “medicalization” of addiction. The fact that we treat addiction with medical means does not imply that a drunk who goes bankrupt did so because of medical expenses.

  211. >>> Note that I can diversify savings that I own, reducing the likelyhood of a catestrophic event. How do I diversify my “govt” exposure?

    > Learn foreign languages

    How about not?

    I’ve no objection to you tying your fortune to the US govt, but I’d rather not.

    Why should I be affected by US govt failures any more than I am by Macy’s failures?

  212. Wow, Shore perfectly epitomizes the sort of person pushing this medical “reform,” someone completely ignorant of economics or the issue in question yet willing to make sweeping claims about “moral imperatives” and the like. The reason medicine costs so much is because the govt sets prices through Medicare. They say they’ll only pay half of what stuff costs, so medical providers simply double their prices to get paid back in full. This is why the uninsured get stiffed, as they’re then forced to pay the full prices, all so the charade imposed by the govt can continue. However, there’s still plenty of competition in medicine, the problem is that the govt is setting prices, with the 45% of the medical market it pays for, and holding back the cost cuts that would result, along with the third-party payer private insurance system. The problem is precisely what Shore claims is the solution: govt pricing.

    As for “opt-in,” most services, like food or a place to sleep, are not really optional either, yet private markets thrive in providing those services. What matters is competition and the fact that the govt keeps it out; claiming that any service that isn’t discretionary can’t be done by private markets is not only ridiculous but illogical. Gas companies would do just fine without a monopoly, you’d just have a private network of pipes that they’d all share, with independent suppliers plugging into the grid at various points. This fantasy that it needs to be a monopoly is the same reason why we have govt-protected telcom monopolies that screw customers every year. As for Arrow’s 1963 paper (think he’s learned something since then?), Jess hit it on the head with the auto mechanic example, somehow we get by just fine despite the similar asymmetries there.

  213. # Ajax Says:
    > The situation of health care in US is much closer to the free
    > market solution than the situation in France.

    I am not sure I entirely agree with this assessment. In some respects it is true, and in some respects not. I think the idea that we have anything approaching a free market in health care in the USA is far from the truth. And that matters a lot.

    > I find it quite likely that the number of bankruptcies in US
    > due to medical care bills is much larger than the one in France.

    As Andy pointed out most medical bankruptcies are due to loss of earnings rather than exceeding benefit limits. However, you were aware that you can get insurance against that too, right? Lifetime limits are part of a broader problem of the way medical insurance is sold in the USA, specifically the lack of competition due to it being buried in benefits packages. (Which means you largely take what you are given.)

    > Wrt. the point about bankruptcies of insurance companies being
    > unlikely. I gave bankruptcy as the simplest example of how the
    > free market can fail you. More likely situation – suppose you have
    > a chronic sickness and lose your job, together with ability to pay
    > the premiums.

    You can get insurance against the eventualities. If you let yourself be under insured then you have to accept the risks that you are taking. I don’t understand why you have a problem with that. It is also important to note that the treatment for many chronic illnesses is massively overpriced due to lack of competition. If your chronic illness costs $50 a month to treat, rather than $5,000, then the situation is completely different.

    > The market has all the incentives to eliminate your insurance
    > and never to provide it back at reasonable cost. Why do you think it would work?

    Insurance elimination is largely a factor of the model of insurance through your employer rather than through personal purchase (and thus maintenance through life as is the case in life insurance.) Having people buy their own medical care and their own medical insurance would dramatically drive down costs, and eliminate most of the problems associated with these sorts of situation.

    However, in the rush to condemn the private insurance market you brushed over the same problems in government insurance. If you live in France and they decide a treatment is too expensive, what do you do? If you live in Britain, and are both overweight and need hip replacement surgery, one precluding the other, what do you do? (Exercise perhaps to loose weight? Oh, no you can’t cause you got a bad hip.) What do you do if the government unilaterally reduces your benefits or increases your claim? What do you do if your drugs cost $5,000 a month and the government won’t pay. If you have no choices what you do is you suffer or you die.

    Those evil private insurance companies have these annoying little things called “contracts.” If they fail to honor their commitments, you can use the power of the state to insist. If the government doesn’t honor its commitments, they you can cast your meaningless protest vote in the next election (if you survive that long.)

    I’d rather the government nationalized the grocery stores than the medical industry. At least I can grow carrots in my back yard.

  214. # Andy Freeman Says:
    > Why should I be affected by US govt failures any more than I am by Macy’s failures?

    Because you live here, and you are forced by law to use their crappy currency, and pay their excessive taxes. (Of course if you don’t live here, substitute your leviathan for mine.)

  215. > The market has all the incentives to eliminate your insurance
    > and never to provide it back at reasonable cost. Why do you think it would work?

    This incentive is present for every service and product, not just healthcare, yet we seem to get along in those other situations. Why won’t the means that work in these other situations work in healthcare as well?

  216. > I’ve no objection to you tying your fortune to the US govt, but I’d rather not.

    Emigrate then.

    > The reason medicine costs so much is because the govt sets prices through Medicare.

    How about some supporting evidence?

    >> The situation of health care in US is much closer to the free
    >> market solution than the situation in France.

    > I am not sure I entirely agree with this assessment. In some respects it is true, and in some respects not. I think the idea that we have anything approaching a free market in health care in the USA is far from the truth. And that matters a lot.

    Still, you’ve got some competition at least.

    > As Andy pointed out most medical bankruptcies are due to loss of earnings rather than exceeding benefit limits.

    Some evidence, please?

    > However, you were aware that you can get insurance against that too, right? Lifetime limits are part

    I wasn’t. What do you mean? I can get insurance against losing a job?

    > of a broader problem of the way medical insurance is sold in the USA, specifically the lack of competition due to it being buried in benefits packages. (Which means you largely take what you are given.)

    If you don’t care. In principle you could dump your company’s coverage or choose a company taking into account the coverage it provides, no?

    > You can get insurance against the eventualities. If you let yourself be under insured then you have to accept the risks that you are taking. I don’t understand why you have a problem with that. It is also

    Can I? I have doubts it’s actually possible to insure yourself in US against the health care eventualities to the degree France provides without paying significantly more than far too many people can afford. But I’d be happy to be proved wrong.

    > important to note that the treatment for many chronic illnesses is massively overpriced due to lack of competition. If your chronic illness costs $50 a month to treat, rather than $5,000, then the situation is completely different.

    I doubt the “overpriced” qualifier has a well-defined meaning.

    > Insurance elimination is largely a factor of the model of insurance through your employer rather than through personal purchase (and thus maintenance through life as is the case in life insurance.) Having

    Not really “as in the case”, because most of the times a life insurance company has no incentives not to sell you the policy, since the risk is mostly dependent only on your age.

    > people buy their own medical care and their own medical insurance would dramatically drive down costs, and eliminate most of the problems associated with these sorts of situation.

    Or so you say.

    > However, in the rush to condemn the private insurance market you brushed over the same problems in government insurance. If you live in France and they decide a treatment is too expensive, what do you
    do? If you live in Britain, and are both overweight and need hip replacement surgery, one precluding the other, what do you do? (Exercise perhaps to loose weight? Oh, no you can’t cause you got a bad hip.) What do you do if the government unilaterally reduces your benefits or increases your claim? What do you do if your drugs cost $5,000 a month and the government won’t pay. If you have no choices what you do is you suffer or you die.

    I’m not condemning anything, just noticing that it can have significantly undesirable effects. Indeed, in France you might not be able to get some expensive treatments. On the other hand, you get the peace of mind you will be treated for most common problems, no matter if you lose your job or not, no matter if you can read through the insurance company’s legalese or not and no matter how little money you have. I’m skeptical of the capability of the free market to provide the latter but again, would love to be proved wrong.

    > Those evil private insurance companies have these annoying little things called “contracts.” If they fail to honor their commitments, you can use the power of the state to insist. If the government doesn’t honor

    Unless you are at the moment too sick to fight in the court. And unless understanding how what the contract says will correspond to the reality when push comes to the shove is difficult.

  217. Ajax, it is well known that Medicare underpays and cost shifts to private insurers. If you don’t know this, you are completely ignorant of the real issues behind this debate. A medical biller once told me that the government will only pay 40-50% of their prices and then insurers will generally pay about 30% more than that govt price. So naturally, the medical providers make up prices that have no relation to their actual costs, like $10 glasses of orange juice or MRIs that cost thousands of dollars. Everybody is trying to screw everybody else in this crazy dance of medical payments and the ones who generally get screwed the most are the uninsured.

    I realize you would prefer more of the same with a govt takeover, but it is the height of stupidity and hubris to then force that on everybody else in this country (plus unconstitutional anyway in significant aspects). Massachusetts already tried this, only it was called RomneyCare ;) before Obama put his name on it, and it has been a disaster. I have no problem with stupid people choosing such idiotic systems for themselves, county by county or state by state, but to force it on everybody else in this country when it has already failed, wow. Oh well, it’s not really that bad, as the Democrats will be swept out this November and in 2012 as a result, and this bill will raise insurance costs so much, it might actually kill the “insurance”/prepay system we have today. There is a benefit in the Democrats being so stupid as to wreck a broken system, so it has to be replaced. :)

  218. Maybe Ajax can tell us why some doctors, pharmacies, and other healthcare providers refuse to handle medicare patients if dealing with the govt is such a joy.

    As govt gets a larger role in healthcare, it’s likely that some of them will quit rather than deal with govt. Is this a good thing? Does Ajax think that their objections will be addressed.

  219. > But the event of the US government going bust would probably cause way more significant problems.

    Hmm. Does more govt healthcare involvement increase or decrease the likelyhood of the US govt going bust?

    If it does go bust because of more involvement in healthcare, is this the fault of folks who opposed said involvement?

  220. > in France you might not be able to get some expensive treatments. On the other hand, you get the peace of mind you will be treated for most common problems, no matter if you lose your job or not

    As is true in the US – that’s Medicaid and the other free public health care.

    So, if you’re going to argue that the free care in the US is inadequate, you have to get into details, which thus far has been your weak point….

  221. > Ajax, it is well known that Medicare underpays and cost shifts to private insurers. If you don’t know this, you are completely ignorant of the real issues behind this debate.

    I never claimed any particular knowledge about the “real issues behind this debate”. But, for the record, I wasn’t convinced by the link. That the company has some customers who won’t pay as much as others for services is quite typical, cf. airlines.

    > I realize you would prefer more of the same with a govt takeover,

    I wonder where this realization comes from. Certainly not from what I’ve written here.

    > Maybe Ajax can tell us why some doctors, pharmacies, and other healthcare providers refuse to handle medicare patients if dealing with the govt is such a joy.

    Who said anything about dealing with the government being a joy?

    > Hmm. Does more govt healthcare involvement increase or decrease the likelyhood of the US govt going bust?

    I doubt that the “likelihood of the US government going bust” is a well-defined term.

    > As is true in the US – that’s Medicaid and the other free public health care.

    I doubt it, based on this website.
    http://www.themoneyalert.com/medicaideligibility.html
    Proof please.

  222. Ajax, you have repeatedly argued against the capability of the free market and private insurance to pay for medicine, saying that the govt is less likely to go bust among other supposed benefits. If that’s not an argument for a govt takeover, please make an actual prescription, that presumably neither argues for insurance nor a govt takeover. I can safely guess that you won’t however, as you clearly want a govt takeover and are just trying to evade your own arguments now. As for being convinced by that link, you must not have read it, as that guy makes basically the same argument as you, a fairly idiotic one I must add. The difference is that airlines can completely voluntarily choose which customers they want to transact with and which prices are acceptable, while the govt has much more power to force prices lower because they control 45% of medical spending. If medical providers want that business, they’re forced to take what little Medicare provides and then charge the privately insured more to cover the full costs. That’s one of the main reasons why many medical providers won’t accept Medicare anymore.

  223. > > Maybe Ajax can tell us why some doctors, pharmacies, and other healthcare providers refuse to handle medicare patients if dealing with the govt is such a joy.

    > Who said anything about dealing with the government being a joy?

    Nice duck, but we have providers refusing to deal with govt. With govt takeover, some of them are likely to quit. Is this a good thing?

    > > Hmm. Does more govt healthcare involvement increase or decrease the likelyhood of the US govt going bust?

    > I doubt that the “likelihood of the US government going bust” is a well-defined term.

    It’s meaningful enough.

    > > As is true in the US – that’s Medicaid and the other free public health care.

    > I doubt it, based on this website.

    That website describes one source of free healthcare. There are others. Anyone in the US can get free healthcare.

    Like France, free healthcare in the US isn’t unlimited. There are procedures and drugs that it won’t do.

    Ajax claims that the France’s “free healthcare” is superior to the US’. Fair enough – let’s see the details.

    What, exactly, can one get “for free” in France? (Note “everyone is covered” is not an answer to that question. Besides, it’s also true in the US.) What non-monetary costs are involved? (Obama’s healthcare is free, as is VA care, but one involves considerably more hoops for certain procedures.)

  224. A commenter on Megan McArdle’s blog, Asymmetrical Information, brilliantly pointed out that we do not have a 3rd party payer system in the USA. We have a 4th party payer system.

    1) The patient and provider agree on treatment, with little regard for the price, since someone else pays.
    2) The medical insurance company pays the contract price for the treatment(s) which the provider has billed.
    3) If the medical insurance company profit margins narrow too much it raises rates to its customers, the patients’ employers.
    4) Some of the customers will switch insurers, but the number is predictable, and will be roughly matched by new customers.

    Rinse, repeat.

    This is why we have medical cost inflation. It won’t change when switching the third party from a corporation to the government, and the fourth party to the taxpayer, except that the third party will incur more and more overhead which will also be billed to the taxpayer.

    Price information never goes anywhere near the patient, who might otherwise choose differently.

    I would like to think I would not trade my daughter’s college money for an extra six weeks of misery.

  225. # BobW Says:
    > I would like to think I would not trade my daughter’s college money for an extra six weeks of misery.

    Personally, Bob, I hope you have the choice either way.

    I read the latest editorial from arch Conservative Joseph Farah at world net daily, and I think he makes an excellent point. Essentially, it is this: how come the people who advocate unrestricted abortion: your body, your choice; are the very same people who want to suck all decisions about your body that do not involve your uterus up into the 168 new government bureaucracies?

  226. Due to asymmetry between the car mechanic and car owner, and the fact that demand for car repairs is largely outside the drivers’ control, obviously the standard competitive model can’t be applied to car repair shops.

    Uh, yeah. Duh.

    Arrow doesn’t go this far, but this is precisely why the Keynesians and the social democrats have been winning all the arguments. Check out the European regulations and disclosure requirements that have been implemented precisely to address problems of this type. Yet in spite of it all, Europe remains an economic powerhouse.

  227. Jeff Read Says:
    > Uh, yeah. Duh.

    Quick question for you Jeff. On a few occasions in the past, you have made statements that I found insanely stupid, which I replied to. You then laughed at me for missing your sarcasm. Unfortunately, sarcasm requires some degree of a shared worldview of what truly is insane.

    Your comment here is clearly totally insane, so I just wanted to check that you weren’t being sarcastic.

  228. Um, Ajay. If you want to post a link, you might want to make sure it supports your thesis. (it is well known that Medicare underpays and cost shifts to private insurers from http://economix.blogs.nytimes.com/2009/10/16/is-medicare-raising-prices-for-the-privately-insured/). I’m quite sure can find better examples.

    Ajay also says “They say they’ll only pay half of what stuff costs, so medical providers simply double their prices to get paid back in full. ”

    If the government is reimbursing at 50%, it is paying more than my insurance company does. I have seen the bills for my son’s surgeries and the reimbursement rate is about 30% of the full rack rate. Does Medicaid only pay 15% (50% of the insurance reimbursement) of the rack rate? Clearly the doctors are being underpaid because they are opting out. Who is stuck paying the rack rate?

    There is an underlying theme throughout all of these arguments. That is that the government can not handle health care (or a lot of other things) better than the private sector. If (a big if) the measure of ‘better’ is lower health care costs, then wouldn’t a low Medicare reimbursement rate argue that the government is doing a better job at keeping costs down? Of course, this is being done at the expense of service because fewer doctors are seeing these patients and the wait times should be going up.

    Does anyone care to post some studies about how the insurance companies with their profit margins are less expensive than a government run insurance group? Of course, this is also assuming that ‘better’ is defined solely by cost, which I do not believe it is. What variables should be used for the optimization of a healthcare system? I would argue we can more efficient than our current system ($7000 per person in the US vs. $3000 in the EU).

    I suspect that a significant part of our health costs are coming from unneeded tests and the excessive number of testing machines that ensue. For example, I have personally needed MRI’s in my life. None of the scans were urgent. I would have been happy to wait 2-4 weeks to get one. Because we have so many MRI machines in my town, I was able to be seen within a few days. This seems inefficient to me. Again, the optimization space is complex, though. What does ‘good enough’ look like?

    Finally, what is the cost to the country of not having better healthcare? I know I would like to start my own business. My son has high medical needs, so I must have insurance and I would never be able to afford private insurance. As a result, I can not start a company until my son gets a job or insurance is much more affordable. I can not be the only person in a situation like this.

  229. > then wouldn’t a low Medicare reimbursement rate argue that the government is doing a better job at keeping costs down?

    Nope.

    It appears that many doctors do as little medicare as possible and some do none. When forced to do nothing but medicare, it’s entirely likely that some providers will simply stop doing medicine.

    > Does anyone care to post some studies about how the insurance companies with their profit margins are less expensive than a government run insurance group?

    The total profit of all health insurance companies is under $10B/year. Add in the executive salaries that piss off congresscritters (who think nothing of much larger salaries for politicians who cycle through GSEs, but I digress) and we’re still not within spitting distance $150B/year, which is the low estimate for Medicare fraud. (The $150B/year estimate is from AG Holder. Other estimates are $200-250B/year.)

    That $150-250B is govt “spending” on heathcare that isn’t actually providing healthcare.

    At the same time, medicare’s appeals process is significantly less favorable to recipients than what folks get with private insurance companies.

    Yes, I’m aware that medicare advocates like to claim that medicare’s claims administration process costs less than that of private companies, but it looks like we’re getting what we pay for. (The advocates also cheat in their accounting because they don’t count all comparable costs for Medicare.)

    > Finally, what is the cost to the country of not having better healthcare? I know I would like to start my own business. My son has high medical needs, so I must have insurance and I would never be able to afford private insurance. As a result, I can not start a company until my son gets a job or insurance is much more affordable. I can not be the only person in a situation like this.

    Are you sure that you’re actually in that situation? Have you done the relevant homework or are you just assuming?

    I ask because I was recently unemployed. When I lost employer coverage, I got a letter from that employer’s insurance provider stating that if I gave said letter to my new insurance company, that company would waive pre-existing condition restrictions.

    There was a deadline – I had to arrange new coverage within 60-90 days (I forget), but surely you’re not going to delay. In fact, since you’re planning to quit, you can do this in advance.

    My previous employer’s insurance company was happy to keep me on for basically what they’d been charging said employer. (FWIW, I’m an “older” single male in San Jose.)

    > I can not be the only person in a situation like this.

    You’re not the only, but you are in the minority. More to the point, fixing your situation isn’t worth screwing up the rest of us, especially since your situation can be fixed without said screwage.

  230. meat.paste, I don’t have to make sure a link supports my broader thesis, I just have to make sure it also stipulates to the same fact that Ajax asked for evidence of. That linked article admits there is cost shifting going on, that’s the only reason I linked to it; it then goes on to moronically argue that the cost shifting doesn’t matter, among other idiotic arguments. I suggest you actually read what has been written, as we already went over this with the airline example. As for you son’s bills, 40-50% is an average, there is a lot of variance around the mean because every medical provider makes up prices differently and tries to recover their costs on different services. The WSJ had a great article a couple years ago comparing prices in several hospitals, some places would charge you $10 for your OJ while others would charge 10 times their cost for certain medicines. There is NO standard pricing anywhere. I already said who pays the rack rate, the uninsured. They’re stuck paying $50k for that surgery that should only cost $10-25k, all so that Medicare and the insurance companies can maintain their fantasy of negotiated rate cuts. You cannot lower costs by government diktat, it requires a highly interactive monitoring process that is done far better by private companies. As Andy notes, it is crazy to obsess over private profits or paperwork when Medicare is losing at least $60 billion every year to fraud. There’s a reason for all that paperwork and checking that the govt can’t be bothered to do.

    As for optimizing the availability of medical equipment, there’s an easy way to do that in a distributed manner, profits and losses. Right now, there is a tendency to overconsume and build up huge capacity because 90% of medicine is paid for by third or fourth parties, ie govt or insurance companies. If we moved to a system where most medical costs were paid out of pocket or through health savings accounts, with insurance only for catastrophic events that cost more than $25k and medical brokers to pool information and act as consumer advocates, all that planning gets taken care of by itself. When I interviewed for a position 5 years ago, I made sure to ask about their insurance opt-out, so they would pay me that money and I could self-insure. I have no intention of letting someone else buy insurance for me and keep fucking it up. Did you know that many companies pay their insurance providers a percentage of medical payments processed? You could not come up with a more idiotic way to incentivize insurance companies. The root of the medical problem is that there’s a bunch of medical consumers who want to fantasize that if they pawn off their medical issues on someone else, with no oversight, they will somehow be taken care of. All that leads to is a bunch of politicians, doctors, and insurers grifting them for more and more money every year, while continuing to peddle that fantasy.

  231. > Ajax, you have repeatedly argued against the capability of the free market and private insurance to pay for medicine, saying that the govt is less likely to go bust among other supposed benefits. If that’s not an argument for a govt takeover, please make an actual

    Of course it’s not. I recommend examining your assumptions.

    > prescription, that presumably neither argues for insurance nor a govt takeover.

    Making an actual prescription takes time and requires way more information than I have.

    > As for being convinced by that link, you must not have read it, as that guy makes basically the same argument as you, a fairly idiotic one I must add.

    I also recommend some more civility.

    > If medical providers want that business, they’re forced to take what little Medicare provides

    You seem to be saying “if medical providers want the Medicare patients, they are forced to accept the terms which come along with them”. I don’t see how it differs from any other business, on the face value.

    > Nice duck, but we have providers refusing to deal with govt. With govt takeover, some of them are likely to quit. Is this a good thing?

    I don’t know. What’s your definition of “a good thing”?

    > Anyone in the US can get free healthcare.

    I’d welcome a proof. Let’s try being specific. Suppose you don’t have a job, are not a subject to COBRA anymore, have some long-term health problems, are 29, your family earns $40K and you get a cancer. How can you get the treatment for free? Clearly, if you can, my understanding of the health system in US needs some improvement.

  232. Ajax, it’s not uncivil to label an idiotic argument as such. If you believe that guy’s arguments aren’t idiotic, feel free to attempt a defense, that should be funny to read. :) The difference between Medicare patients and any other business is that the govt forces everyone to pay into Medicare and then sets those fantasy prices for medical services for that large cohort of old people. This nationalizes the payment process for a giant segment of medical customers, as the old naturally use the most medical services. Medical providers are then forced to either ignore that large segment or take them on to build volume or just because they feel sorry for them, while shifting the remaining cost on the private sector. This process has become so bad however, that they’re increasingly just ditching Medicare altogether, which is saying something. That’s not even including all the separate regulations and govt funding for hospitals, that then forces them to create the crazy price charts that have already been mentioned. If you can’t see the difference between all this and willing price discrimination by airlines, you would have to be fairly obtuse. As for the difference between “free” medicine here vs France, the truth is that both are mixed systems, as Jess alluded to earlier. France might pay a marginally larger proportion through the govt but most providers are private, unlike the disaster of the much more nationalized UK system. Point being, the US is much closer to France than most people realize, while thankfully not as bad as the UK.

  233. > > prescription, that presumably neither argues for insurance nor a govt takeover.

    > Making an actual prescription takes time and requires way more information than I have.

    That lack of information doesn’t seem to be an obstacle when it comes to making various claims and evaluations.

    > > Nice duck, but we have providers refusing to deal with govt. With govt takeover, some of them are likely to quit. Is this a good thing?

    > I don’t know. What’s your definition of “a good thing”?

    Do you think that health care providers quitting will improve health care?

    > Suppose you don’t have a job, are not a subject to COBRA anymore, have some long-term health problems, are 29, your family earns $40K and you get a cancer. How can you get the treatment for free?

    The above suggests a misunderstanding of what COBRA is. Until the recent subsidies, COBRA was merely “you can pay through your employer for 4% fee” – it wasn’t free. And, when I ran out of COBRA, the insurer offered to let me keep going (without the 4% fee, because now they were getting the money directly). (If I had figured that out sooner I’d have saved myself 4%.) They also sent me a letter (previously cited) which other insurers would accept to waive pre-existing condition restrictions.

    So, the hypothetical person isn’t actually affected by the end of COBRA, but by running out of savings, COBRA or not.

    This hypothetical person can get some treatment for free at the local county hospital and the various free clinics, not to mention emergency rooms. Also, $40k is low enough that Medicaid might be available (it depends on family size).

    Yes, there are limits on this care, just as there are limits on the “free care” under any system.

    Or, do you want to argue that France or some other country does whatever it takes for everyone?

    There are always limits on free care, so the honest argument is over how much, which requires knowing details.

  234. > Ajax, it’s not uncivil to label an idiotic argument as such. If you believe that guy’s ?

    Sure it is. Would you do this in a math class when your professor made a mistake?

    > Medical providers are then forced to either ignore that large segment or take them on to build volume or just because they feel sorry for them, while shifting the remaining cost on the private sector.

    I don’t see how this differs from what you’ve said before. Clearly, either you make the profit on these customers or you don’t. Are you saying all these businesses are only surviving due to profits from the private insurance because they feel sorry for the Medicare patients? And poor private insurance somehow can’t negotiate the prices down to the Medicare levels? Frankly, what seems to be more likely, is that the profit margins on Medicare are slim, yet still non-zero.

    > between all this and willing price discrimination by airlines, you would have to be fairly obtuse.

    There you go again.

    > That lack of information doesn’t seem to be an obstacle when it comes to making various claims and evaluations.

    Some examples? I was mainly discussing the purely theoretical claim of the purely free market being able to provide the healthcare.

    > Do you think that health care providers quitting will improve health care?

    How would I know? Maybe the remaining ones would become more efficient? Or maybe the people would get angry and vote to power a better change?

    > This hypothetical person can get some treatment for free at the local county hospital and the various free clinics, not to mention emergency rooms.

    You are aware that the emergency rooms are not free, right?

    > Or, do you want to argue that France or some other country does whatever it takes for everyone?

    No. I am genuinely curious if you can get in US the same level of healthcare you’d get in France for roughly the same cost no matter what your life situation is.

  235. Ajax, so a mistake is the same as an idiotic argument? Please, take your prevarications elsewhere. My argument didn’t differ from what I said before, I expounded on the original because you seemed incapable of understanding it. The point is you don’t make a profit on 30-50% of the market because the govt has nationalized it by compelling people to pay into Medicare by force of law. Yes, that is exactly what is meant by cost shifting because of below-cost Medicare pricing, profits from private companies must pay for losses on Medicare patients. “Poor” private insurance cannot “negotiate” down to Medicare levels because nobody will negotiate down to loss-making prices. The govt offers “take it or leave it” loss-making prices on Medicare, the medical providers have increasingly decided over decades to leave it. It is difficult to say what the exact level of average profit or loss on Medicare transactions is because of the arcane pricing charts mentioned earlier, but it is likely a 10-30% loss. It is funny how you think change is driven by voting, hilarious. :D As for calling you obtuse, hey, if the shoe fits. ;)

  236. > > This hypothetical person can get some treatment for free at the local county hospital and the various free clinics, not to mention emergency rooms.

    > You are aware that the emergency rooms are not free, right?

    There’s a difference between sending bills and getting paid. And, there are the free clinks and “county”.

    Which reminds me – does France have anything comparable to St Jude’s, the Shriner’s Hospitals, or the Mayo clinic?

    >> Or, do you want to argue that France or some other country does whatever it takes for everyone?

    > No. I am genuinely curious if you can get in US the same level of healthcare you’d get in France for roughly the same cost no matter what your life situation is.

    The US does discriminate against rich people WRT free medical care, so if France doesn’t, advantage France.

    However, remind me – what do you actually know about free medical care in France?

    Ajax seems to have dropped the COBRA argument. I’m seeing a pattern. He tells what he thinks is a decisive horror story only to be told that he got the details wrong, so he moves on to another story.

  237. > > Do you think that health care providers quitting will improve health care?

    > How would I know?

    You claim to “know” about everything else.

    > Maybe the remaining ones would become more efficient? Or maybe the people would get angry and vote to power a better change?

    That’s your plan? Make things worse so that something better will happen?

  238. > Ajax, so a mistake is the same as an idiotic argument?

    It’s worse, because it’s objectively false, at least in the context of the math class.

    > because of below-cost Medicare pricing, profits from private companies must pay for losses on Medicare patients

    Clearly you’re omitting something from the picture. If I have a company and some customers bring me losses, why would I take them in the first place?

    > There’s a difference between sending bills and getting paid.

    I’ve heard this argument and I still think it’s pretty close to claiming there’s no poverty, because you can always rob a bank. But I forgot to ask – would the free clinics provide long-term cancer treatments for reasonable prices too?

    > Ajax seems to have dropped the COBRA argument.

    I didn’t make any COBRA argument, I asked a question. I’d think the difference is obvious.
    But actually, it’s a good point you could always use HIPAA to get a new insurance, but are there any limits to what you could be charged when you get an individual insurance plan with a preexisting condition?

    > You claim to “know” about everything else.

    No, I don’t. Quite the opposite.

    > That’s your plan? Make things worse so that something better will happen?

    What plan? You asked a question, I answered. You’re drawing some overreaching conclusions.

  239. Ajax, aah, so an easily falsifiable logical error is worse than an idiotic argument about a more complex economic issue? No chance, the only reason there are more people critiquing the former is that most don’t have the ability to reason about the latter. You might have taken loss-making customers because they weren’t always so, Medicare pricing has been squeezed lower over the decades. Another reason is volume, as I mentioned earlier. At certain revenue thresholds, it makes some sense to gain volume to pay off your fixed costs, while making your profits off the privately insured. As the pricing gets worse, that math increasingly makes no sense.

    Why would there be limits on premiums when you have a pre-existing condition? Someone who has a condition will cost more, so they have to pay more. Otherwise, all the other customers have to pay more to add that sick customer and take care of him. The current law prohibiting this is deeply stupid and contrary to economics, putting the lie to calling what we have “insurance.” It’s a medical prepayment scheme, that greatly benefits the medical providers, and which the Obama and the current congress have been bought off to increase. As I said before, this will only end up killing insurance off, which frankly gets us to the same goal as Bush/McCain of moving us to medical savings accounts, just done in an incredibly stupid and roundabout way. :)

  240. > I didn’t make any COBRA argument, I asked a question.

    Actually, you did. You described what you thought was a disaster and included COBRA as one of the reasons for said disaster. It turns out that you didn’t know anything useful about COBRA.

    This isn’t the first time you’ve tried to play that game.

    Note that we’re still waiting for any evidence that you know what free care is available in France (your favorite example) or the US, yet you’re confident that one has more free care than the other.

    > I’ve heard this argument and I still think it’s pretty close to claiming there’s no poverty, because you can always rob a bank.

    Not at all. We don’t jail people for refusing to pay medical bills. We have forgiveness programs.

    Heck – we have medicaid. A huge fraction of the so-called “uninsured” are medicaid eligible. They don’t sign up until they need care but they’re covered.

    > If I have a company and some customers bring me losses, why would I take them in the first place?

    There’s a difference between average and marginal cost. Plus medical providers get horrible press for turning away medicare/medicaid folk.

    > > That’s your plan? Make things worse so that something better will happen?

    > What plan? You asked a question, I answered. You’re drawing some overreaching conclusions.

    You made a proposal wrt govt healthcare. I pointed out one of the consequences and asked whether that changed your opinion of your plan. You tried some dodges and now you’re denying the original proposal.

    Do you not know that you don’t know whether your proposals make sense or do you simply not care?

  241. From http://www.themoneyillusion.com/?p=4626

    ” Most developed countries have governments that spend about 8% of GDP on health care, with another 2% from the private sector. Their public expenditures cover almost their entire populations. The US public sector also spends about 8% of GDP on health care, but this only covers a modest fraction of the population. Another 8% or so is spent by the private sector. Actually, this example is even more surprising that Mankiw’s. Think about it; because per capita GDP in the US is higher than in other developed economies, in absolute terms our government actually spends more (per capita) on health care than almost any other government. Even before ObamaCare. We ought to be able to put the entire US population on Medicare and Medicaid without spending an extra dime.”

  242. meat.paste, you say “I can not start a company until my son gets a job or insurance is much more affordable.” but I think you mean “I can not start a company until health care is much more affordable.” which really means that you want to get rid of the current system and go to a system of customer-regulated health care. That’s the only thing likely to actually reduce health care costs. Shifting the cost onto the taxpayer just means that there’s less money for people to buy your company’s products.

  243. Andy Freeman:
    > Plus, companies like to maximize profits.

    No, companies — public ones, at least — *are required to* Maximise Shareholder Value. Even if that’s not the best thing to do by other measures, such as whatever your personal perception is of the Public Good.

    If the executives do any thing else, the board will fire them.

    It has no choice, since if it does anything else, it runs the real risk of shareholder lawsuits.

    And then we’re back where Jessica went above: tort reform.

    I’d extend it: I don’t think we can abolish public corporations, but I think we’d all be a lot better off as a society if people were required to hold stock at least 30 days before they could sell it.

    We have, effectively, negative feedback in the market. Is there an engineer in the house?

  244. > And then we’re back where Jessica went above: tort reform.

    Huh? Tort reform is aimed at bogus lawsuits. Tort reformers have always said that they want to preserve lawsuits aimed at actual misbehavior. A company or directors that were not satisfying their legal obligations surely qualifies.

    > I think we’d all be a lot better off as a society if people were required to hold stock at least 30 days before they could sell it.

    And that’s relevant how?

    > We have, effectively, negative feedback in the market. Is there an engineer in the house?

    Let me guess – you don’t actually know anything about systems with feedback. (“actually know”
    means, at a minimum, that you know the relevant equations. Yes, math is required.)

    I ask because engineers know that it’s much easier to make a stable system with negative feedback than it is to make a stable system with positive feedback. So, your suggestion that “negative feedback” in the market is a bad idea either requires significant elaboration or reveals that you don’t know how feedback works so you went with “negative” because you think that “negative” means bad.

  245. >So, your suggestion that “negative feedback” in the market is a bad idea either requires significant elaboration or reveals that you don’t know how feedback works so you went with “negative” because you think that “negative” means bad.

    Sorry, Baylink, but Andy is quite right about this. You’re busted.

    You clearly think the profit-seeking behavior of corporations is a bug, but it’s a feature. Without that profit motive, nobody would invest for increased efficiency.

  246. He does raise a common point though, all this blather about how shareholder value has now been legally elevated above all else, so that any directors who don’t maximize it at all costs will get sued into oblivion. Sounds like a lot of hooey, but I haven’t looked into the case law to try and figure out what Baylink and his ilk are trying to base that claim on.

  247. > so that any directors who don’t maximize it at all costs will get sued into oblivion.

    That assumes facts not in evidence.

    Consider – Google provides free food to its employees while few comparable companies do.

    It can’t be the case that the providing free food both does and does not maximize profits. In other words, the different free food for employes policies tell us that either Google’s directors or the directors of comparable companies are failing to “maximize shareholder value at all costs”.

    Yet, there are no lawsuits over such policies.

    There are two possible explanations.
    (1) The plaintiff’s bar is unaware of those policies. Maybe they’re unaware of the free food policy, but that’s just one example of differences between corporate policies that affect profits. Surely they’re aware of some of them.
    (2) The plaintiff’s bar doesn’t believe that they can win arguing “maximize profits at all costs”.

  248. That’s not much of an argument, Andy, that the lawyers haven’t enforced the supposed rule always and everywhere. ;) The question is where have they enforced it and how onerous has that been? I don’t know the answer to that. Anti-sodomy laws on the books don’t matter until they do.

    On a larger note related to the original post, I just stumbled across this excellent interview with one of Krugman’s old professors and really enjoyed these quotes:

    “The threat from the left, on the other hand, is much more serious because they oppose free trade on equity grounds. I love America. I have settled in it. But there is a tendency, particularly on the part of the Democrats, to become totally self-righteous on everything and this is the way it has to be and if you disagree, then you’re a Republican. I mean, that’s the way they argue it. It’s unbelievable. They don’t want to argue the merits of the case.”

    On global warming – “First, you’ve got to decide whether there is a problem of an externality. I have doubts about these scientists who claim to have a consensus on global warming because, you know, Freeman Dyson, a great scientific figure, says these guys are really low-level scientists and I’m told by many that they, in fact, are. And if they reach a consensus, I don’t care. I mean, that’s the consensus of incompetents.”

  249. > That’s not much of an argument, Andy, that the lawyers haven’t enforced the supposed rule always and everywhere.

    Except that that’s not my argument.

    > The question is where have they enforced it and how onerous has that been?

    The “rule” in question is “any directors who don’t maximize [profit] at all costs will get sued into oblivion.”

    We have plenty of examples of directors (and companies) getting sued for failed diligence and other things to “maximize profit”. This shows that there is significant interest and activity in the area. (This distinguishes our case from sodomy laws – DAs will refuse to prosecute for political reasons. The plaintiff’s bar shows no such restraint.)

    Another question is whether one can show an effect on profitability. It isn’t very hard to find “studies” showing that a specific type of benefit or HR practice improves profitability, for a large number of benefits and HR practices. This is relevant because it helps establish a prima facie case without requiring discovery.

    Our host claims that every bug is shallow to the right set of eyes. I don’t know if that’s true in the stated strong form, but I’m willing to believe that a much weaker form holds. Specifically, if there are a lot of “valuable to find” bugs and lots of motivated folks looking for said bugs who have a history of finding such bugs, someone is very likely to find some of said bugs.

    I believe that said weaker form applies to the claim “any directors who don’t maximize [profit] at all costs will get sued into oblivion.”

    Of course, it could be that some directors have been sued over free food and the like.

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