Bastiat’s Bastions

As we should all know by now, there is an outbreak of swine flu spreading around the world. While this strain of flu has proved rather deadly in Mexico, it has not yet been so fatal in its U.S. cases. While most of the response in the U.S. and the rest of the world has been cautious, some voices have been on the panic end of the scale. Vice President Joe Biden, always ready to open his mouth wide enough to fit his foot, told the press that he advises his family to avoid air travel, and any other mass transportation mode, such as trains and buses (see the USA Today’s “Today in the Sky” air travel blog by Ben Mutzabaugh).

The problem is that many people will take Biden’s advice. But shouldn’t that reduce the spread of swine flu? Maybe. But there is something else that people need to keep in mind that may not occur to them. By thinking that air travel is now more costly, in terms of one’s health and the risk of getting the flu, this increase in the non-monetary cost flying will reduce the amount of miles traveled by plane and will surely increase the miles traveled by automobile if there is a significant positive cross-elasticity of demand between air and auto travel. Shane Sanders, Assistant Professor of Economics at Nicholls, had a paper published recently in the Journal of Economic Education that should help us think about value of Biden’s advice.

In his paper with Dennis Weisman and Dong Li, Sanders discusses the substantial cross-price elasticity of airline and automobile travel, which suggests that higher prices for airline travel induces people to substitute auto for air transportation. Of course, health fears, as they raise the perceived cost of air travel, should also induce substitution into auto travel.

The problem is that auto transportation is not as safe as air travel, and it is not even close. According to the Department of Transportation’s statistics (shown and cited in the Sanders, Weisman and Li paper), for every 100 million air passenger miles traveled, there are .3 fatalities, while for every 100 million auto passenger miles traveled, there are .97 fatalities, so passenger mile for passenger mile traveled , auto transportation is over 32 times as deadly.

So, without realizing the relative safety of air and auto transportation, when people hear that Vice President Biden is suggesting to his own family that they avoid air travel, some people will switch from air travel where the chance of a fatality is very small, even after factoring in the very minute chance of getting swine flu, and passing it on to family members. In this case, the number of fatalities, including swine flu, is likely to increase.

-MC

As I discuss in my Health Economics class, hospitals are, in most places, the largest employers of nurses.  With the nursing profession still dominated by women, often as second earners in their household, nurses tend to be less mobile than many other professionals.  In addition, in many communities there are few hospitals within commuting distance, giving those hospitals in commutable distance what economists term as a “monopsonistic” position in wage determination.

A monopoly is a market type characterized by having only one seller or by a very dominant seller. A market that is monopsonistic, or simply a “monopsony,” on the other hand, is a type with just one buyer.  The “mon” (from Ancient Greek “monos”) part of the word means “single,” while the “opsony”  (from Ancient Greek “opsnia”) part means “purchase,” so “monopsony” means a single-purchaser market.

When a market has a single buyer, that buyer has an extraordinary amount of bargaining power and can strongly influence the market price.  To get more nurses, better pay and/or better benefits must be promised or the hospital will be unable to attract more people to be nurses at their hospital.  That is, the supply curve of nurses is upward sloping, so if a hospital wants more nurses, they would have to increase nurses’ pay, new and incumbent nurses alike, or incumbent nurses may just quit to be rehired later at the higher pay.  Or they may just make things difficult for the hospital administration that pays new nurses more than loyal workers.

Let’s look at a simple numerical example.  Suppose that a hospital could attract and maintain a workforce of 500 nurses by paying them each $50,000 a year, for a labor cost of $25 million a year.  Now suppose in order to increase this workforce up to 600, pay would have to go up to $60,000 a year to attract the next 100 nurses, often from greater distances.  In this case, labor costs increase from $25 million to $36 million, or 44% more in labor costs for a 20% larger force.  This is because both the additional 100 nurses had to be paid more, but so did the 500 incumbent nurses.

How can the higher pay be limited to just those new nurses without paying more to the existing nurses?  This is where nursing contractors come in.  The contractors work for someone else and usually commute great distances.    The pay is higher for the contract nurses and the hospital’s nurses do not revolt.  In this case, the labor costs are the $25 million for the hospital’s 500 nurses and another $6 million for the contract nurses, pushing costs up to only $31 million instead of $36 million, or by 24%, not much more than the increase in nurses.

This past Saturday I, along with some colleagues and a student of mine from Nicholls, attended the Louisiana Political Science Association meeting at the Grambling State campus.  The meeting was helpful and very cordial, even though many of us strongly disagreed with one another.

There was a panel of undergraduate papers with two papers from Centenary students (my student and I presented a joint paper with Dr. Sanders in another session).  There was another panel of graduate student papers.  Both of these undergraduate papers were very interesting.  Allison Saylor an undergraduate student at Centenary had a nicely done paper titled ““The Bush Administration, Private Military Contractors, and the War on Terrorism,” in which she examined the substantial growth in the use of military contractors in the war in Iraq.  She posed a very useful question, “why would the war in Iraq require so many more contractors than we saw in previous wars?” (Quote marks are used here for my interpretation of her paper rather than a quote from her.)

During the discussion period after her presentation, I think the presenters, discussant, session chair and the audience arrived at a reason for this large expansion of contractors.  The last protracted war that the U.S. was involved in was Vietnam, and soldiers could be drafted then.  Any “desired” expansion (by the Administration) was met by increases in the number drafted. To expand under a voluntary force, we need to either attract more soldiers by increasing their benefits or by outsourcing non-combat roles to civilians.

The latter solution, outsourcing to private contractors, is likely to be less costly for two reasons.  Many of the non-combat requirements of a military force are things that many private sector companies are already doing and things where they have particular expertise, such as warehousing and goods distribution, food services, accounting services and construction.  Soldiers are no better at doing these activities and are probably worse than trained civilians at these sorts of  activities.  While this was also true during earlier wars, these activities in those days could be manned with soldiers who were drafted and forced to work below their opportunity cost or their voluntary wage rate.

The other reason for outsourcing certain tasks often performed by soldiers is exactly analogous to the nursing monopsony story told above.  The market for warriors is a monopsony market with the Department of Defense just about the only buyer in the market.

How can the higher pay be limited to just those new soldiers without paying more to the existing soldiers?  The contractors fill certain non-combat roles, while the military personnel perform the combat roles.    The pay is higher for the contractors, and the combat troops do not revolt.

While it might have been the case that certain contractors got sweetheart deals, no-bid contracts or cost-plus contracts, it is likely that troop increases with a voluntary force may have to increase pay to all rather substantially to get only a few more warriors.

I should point out that the return to the draft is not a solution to this high incremental cost of troop expansion, because the real opportunity cost of a draft is that some people are forced to do military jobs, often giving up positions where they are far more valuable to the country than as soldiers.  This social cost of the draft is hidden from presidents, congressmen, taxpayers and voters and they often do not consider such costs in their decisions.

Finally,it is almost ironic that those who kill and those who heal face the same sort of labor market issues, and those who hire them face similar incentives to price or wage discriminate.

-MC

We are told by politicians that the way to reduce health care costs is by getting more people covered with health care insurance and getting more preventative care. Maybe. Maybe not.  When we look at the numbers, we have to conclude that the problem is that demand is shifting up faster than supply.  The only thing that will bring health care prices down is if we are able to get supply to increase faster than demand.

Recently, the White House hosted a Health Care Summit. C-SPAN had some good coverage on it that you see at their website. The links to the events are:

Summit Opening Remarks, Breakout Session, Obama and Kennedy: Closing Remarks on Healthcare Summit, BilyTauzin Interview on Pharmaceuticals.

Most of the discussion centered on health care coverage–insurance. I would suggest that the problem that most Americans face is not whether or not they are covered, but the high cost of coverage.  Premiums are very expensive. A lot of the productivity gains of the American worker in the last 20 years has been paid to the employee, not in wages, but in the employer’s share of health care premiums.

I plotted some health care data and came up with an interesting picture. I based this picture on two date sources: 1) National Health Expenditures 1960-2007 from the Centers for Medicare and Medicaid Services (http://www.cms.hhs.gov/nationalhealthexpenddata/ downloaded 3/10/2009) which provides estimates of the total expenditures in the US on health care and 2) the Consumer Price Index (CPI) subindex on health care (just like there is one on energy and another on food) which comes from the Bureau of Labor Statistics. I got a relative price of healthcare by dividing the Health Care CPI by the complete CPI (all goods and services). This tells us which is going up faster, general prices or health care prics and if HC is becoming more scarce (more in demand relative to what is going on with supply).

I divided the expenditure data by the Health Care CPI to get a quantity measure and then divided through by the population, to look at the quantity in per capita terms (more people means more buyers, but more suppliers too). Price and quantity combinations observed in the diagram below do not show a supply curve or a demand curve, but rather show where supply and demand intersect–the “equilibrium” values.

On the diagram above, the price is the Medical Care component of the Consumer Price Index (CPI) divided by the general (all goods and services) CPI, and multiplied by 100. 1983 is used as the base year (1983=100 for both all prices). The Quantity axis measures Health Care Expenditures per capita (Expenditures divided by the population) for that year and then divided by the Medical Care CPI, which gives us a measure of quantity for that year. Then, this quantity figure is “standardized” by 1983’s quantity (all years quantities divided by 1983’s quantity. The above should not be thought of as a demand or a supply curve, but showing the path of equilibrium prices and quantities for the years from 1960 (point furthest to the left) to 2007 (point furthest to the right). Think about how supply and demand must be shifting to give such numbers.

By the way, the 1960 point is at the lower left and the 2007 point is at the upper right. For things to look like this though, the demand must be growing or shifting out to the right faster than supply is increasing. And why has this occurred? Expanding health insurance coverage. The more someone else is paying our bills, the more we spend and the less attention we pay to our costs. Ever notice all those scooter store ads on TV, ads you never saw before Medicare started paying for scooter chairs? And all the ads say buy this and let Medicare pay for it (”If we approve it and Medicare turns you down, you get to keep the chair”), not a cent out of your pocket.

So, health care is way too expensive, because we have pushed up demand with all of our health insurance–and the politicians’ answer is more of the same, more HC insurance, more 3rd party payment, less individual responsibility. The folks at the Health Care Summit routinely avoid talking about doing anything on the supply side of the market–getting more doctors, more nurses more hospitals, more pharmaceuticals for the same prices (shifting supply out). Here are the questions we should be asking: How do we get the FDA to speed up its approval process? How do we get the med schools and nursing schools to open up their doors a bit wider? These are the things we need to get affordable health care, as universal health care increases demand without doing anything about supply.

-MC

One of the important points made in an introductory economics class concerns a measurement of demand, of buyer behavior, called the “elasticity of demand.”  Elasticity of demand measures how buyers respond to price changes by reducing their purchases.  Here are two possibilities to consider:  1) buyers respond so much to price changes, that when the price of the good increases, total spending on that good goes down;

2)  buyers cut back some when the price goes up, but not by much, so that price increases lead to more spending on the good.

The first case occurs when buyers can easily buy replacement good usually referred to as substitutes.”  An example of this first type of good might be something like chicken thighs, as there are other parts of chicken available, other types of meats and other types of foods, all of which substitute for chicken thighs to some degree.  This type of good is said to have an “elastic” demand.  The second occurs when there are few substitutes for the good under question, such as with an addictive substance, like tobacco or heroin, which are said to have inelastic demands. 

A way that some economics instructors drive home the importance of understanding elasticity of demand is by using the example of heroin and effectiveness of U.S. drug policy.  Heroin, being highly addictive, has a highly inelastic demand.  Higher prices lead users to cut back some, but by such a small amount that overall spending on heroin rises when prices go up.  When the U.S. DEA is able to reduce the supply of heroin into the country, the price of heroin naturally increases.  Since heroin has an inelastic demand, higher prices lead to increased spending on heroin.   Heroin addicts seldom have great jobs and so much of an addict’s source of spending is from money-making criminal activities, from prostitution and pornography production to thefts, ranging from car theft to burglary to mugging. 

What all this means is that higher heroin prices because of more effective interdiction of heroin imports leads to higher rates of money-making crimes even though the amount of heroin flowing into the country is reduced, because the street value of heroin coming in increases.  This suggests that giving heroin away, instead, would cause crime rates to fall. 

Well, that is exactly what happens.  In this article about legalizing heroin in Switzerland, it is noted that crimes by heroin addicts “have dropped 60 percent since the program began in 1994….”  In addition, if the government is supplying safe heroin, so that there is no possibility of running a profitable heroin trade, there will be no wars among rival heroin suppliers.That certainly should give us something to think about.-MC

A few weeks ago, PricewaterhouseCoopers (PWC) released its study, “Healthcare policy in an Obama administration: Delivering on the promise of universal coverage.” (You can read about PricewaterhouseCoopers here).

Obama’s plan is modeled after the Massachusetts healthcare system. His (near) universal coverage plan comes, not from a public takeover of the healthcare industry public ownership of the means of production in that industry-socialized medicine, but from subsidizing small firms’ healthcare coverage expenses and requiring businesses of all sizes to provide healthcare coverage for workers or face a hefty fine. What is substantially different about Obama’s plan from the Massachusetts system is Obama’s plan does not force individuals to purchase healthcare coverage. What we do have to keep in mind, however, is that it is unlikely that the healthcare reform that goes through Congress and is signed by Obama is the exact one that Obama recommended.

PWC estimates that the federal government’s cost for this expanded coverage, mostly from subsidizing small businesses, would amount to $75 billion a year, at least initially. As with all entitlement programs, initial estimates of future costs are underestimated and often overlooked. Real costs for Medicare and Medicaid were about 10 times what was originally estimated. Let’s hope that the estimates for Obama’s plan come closer to the mark. Here is what happens: as more people are covered, demand for health care expands greatly, pushing healthcare costs up dramatically. This results in calls for price controls, which create shortages, along with political civil wars to drop coverage for certain procedures and certain medications.

Healthcare coverage for more people, while laudable, drives healthcare prices up for everyone and ignores consideration for how these more highly demanded services are to be delivered. Giving more people the ability to pay without increasing the number of healthcare providers merely puts more people into waiting rooms, without doing anything about actually getting people diagnosed and treated. We end up worse than the Canadians, with not only month-long waiting lists for specialties, but with month-long waiting lists to see primary care physicians. Massachusetts was able to handle this by getting more doctors and nurses from other states. This cannot be done so easily for the nation as a whole.

We often fail to see things from both sides. It is easy for us to put ourselves in the place of healthcare buyers, because most of us are. We have a difficult time seeing the big picture of both healthcare buyers and healthcare suppliers, but if we succeed in putting more people into waiting rooms without getting more doctors and nurses to into examining rooms and treatment rooms, we will see prices for healthcare take the express elevator through the roof. Then, political demands arise for a government takeover of the healthcare industry. As Steve Lieber, CEO of the health trade association Health Information and Management Systems Society (HIMSS), is quoted as saying: “Apply traditional economic principles. If you have an increase in demand, there should be some type of effort to address the supply side. It takes time to increase the number of physicians. As demand increases in that sense, it can be an economic incentive on the provider to become more efficient.” (p. 18)

However, the AMA and ANA control the accreditation of medical and nursing schools, and the licensing of doctors and nurses. There are several ways of increasing the supply of providers. Massachusetts, for instance, allows patients to designate a nurse practitioner or physician’s assistant as their primary care provider. They also required their medical schools to graduate a minimum number of primary care physicians. Of course, this does not keep these graduates from going out of state and obtaining more lucrative specialties.

Two things beyond the Massachusetts reforms are needed to really increase healthcare supply. First, is to require the medical schools and nursing schools to increase their graduation numbers. Second, with the political support from the AMA and the ANA and the current political frenzy over immigration, it is far too difficult for qualified doctors and nurses from overseas to come into the US and practice their professions—this needs to be reversed.

All-in-all, Obama’s plan is not the takeover of the healthcare industry that Hillary Clinton’s almost became. Still, without some rollback of the governmental regulations that provide unnecessary barriers to entry into the healthcare industry, his plan will cause prices to rise so substantially that the voters will demand a government takeover of the industry.

-MC

Responding to McCain’s sole zinger line in the final debate, “If you wanted to run against George Bush, you should have run for president four years ago,” Obama compared McCain’s voting record with the White House position and pointed out that McCain voted with the Bush White House 90 percent of the time. Then Obama repeated that old line “And if it walks like a duck….”

In a now well-known interview, Obama’s running mate, Joe Biden, laughed off a question about Obama being a socialist. Well, there are very few admitted socialists elected to office in this country. And to my knowledge, only one avowed socialist elected to any national office in the last 30 years, Bernie Sanders from the state of Vermont (see this article in the New York Times Magazine from January 21, 2007 by Mark Leibovich). Sanders calls himself a social democrat but has officially run as an Independent over the years.

I started to wonder how close Obama’s voting record was to Senator Sanders, since the closeness of McCain’s vote turned him into George W. So I went to the website of the U.S. Senate and found the Senate roll call votes here. Both Obama and Sanders are freshmen Senators in the 110^th Congress, so it makes their voting records easy to compare.

In one crucial respect, their voting records are quite different. Senator Sanders missed only 6 out of 655 votes held in the Senate in the 110^th Congress, voting over 99% of the time. Obama, on the other hand, had voted only 36% of the time in 2008 and slightly less than 54% of the time in the 110^th Congress (2007 and 2008 combined). Of course, Obama ran for president and Sanders did not. Still, by August 3, 2007, Obama had already missed more votes in the U.S. Senate than Sanders had by October of this year. And there weren’t any primaries to run for before that August date.

After excluding the many votes that Obama did not cast and the few that Sanders could not cast, there were 348 votes where both voted. Of these 348 votes, Obama voted with Sanders 320 times, or 92% of the time.

Certainly, Obama’s redistribution policies and his proposed takeover of the U.S. health care system, his agreement (like McCain and Bush) to take over banks and help out the auto industry, his plan to take away the secret ballot from workers for union representation elections and his proposal to lift the minimum wage to one that compares to what the French have (which has led to widespread minority youth unemployment and riots there), all show that

Obama has the socialist walk and quack down pat.

With a voting record that matches the voting record of an avowed socialist, how can Obama deny being a socialist? Bernie Sanders doesn’t.

-MC

Before anyone gets too excited about the prospect of universal healthcare insurance, we should stop to think about what this will really accomplish. First, we should acknowledge that the very poor and the old are mostly covered, and that the largest part of the uninsured really are people who expect to have little use for medical care, and so, take the risk upon themselves. This is the group of 18-35 year old males.

We should note that universal health insurance, by itself, will do nothing to reduce healthcare prices, and in fact will tend to increase prices of health care and the premiums for health insurance because it will serve to increase the demand for healthcare while doing nothing to also increase the supply. Any increase in demand for healthcare because doctor’s visits may suddenly appear to be less costly (paid for through premiums or payments from the government) will merely push up the basic price of healthcare. Healthcare premiums will be pushed up as a result to cover the extra demand.

What is happening now, though, with partial coverage is a problem as well. Here is what happens. Some are covered, and some are not. Those covered are able to access health care at subsidized prices (that they pay for in fixed monthly payments), while those who are not covered pay full price. I think of it like making beer insurance available to college students, insurance that pays their beer tabs. This boosts the beer consumed relative to the full price, or in economics lingo, it boosts the demand for beer. If beer were like medical care, the problem would suddenly become very serious, because the supply of medical care is tightly limited, by medical schools, professional associations, licensure, and even government limits on supply.

But medical care is not quite like beer, because getting poked, prodded, probed, stuck, bled and disrobed, is not as appealing to most as a few cold ones. Many go to the doctor only reluctantly, just as many leave the pub only reluctantly.

The problem is that when some get their health care at some subsidized price, the demand ends up increasing and the full price to the uninsured increases. Some get healthcare a little cheaper perhaps, while others find it difficult to afford.

But what happens when we all are covered with healthcare insurance? It is much like the problem when we all stand to get a better view of a play in a football game–none of us end up getting a better view. When we all get healthcare insurance, we end up paying very high premiums and doctor visit fees much like we would have faced without coverage for doctor visits.

When we have privately paid for health care, or privately paid insurance and managed care plans, the managers of such plans cover certain treatments and do not cover others, bringing to mind the 1997 movie, “As Good as It Gets,” with Jack Nicholson, Helen Hunt and Greg Kinnear, where a boy’s asthma treatment was not covered by his mom’s HMO. At least there is some competition between plans, and employers do most of the “picking” amongst plans, but do so as an alternate means of paying their employees. As a result, though, legislators then have an incentive to mandate coverage of treatments that have political support.

The decision as to what is covered and what is not comes about as a political decision, with the benefits going to small concentrated groups and the costs spread over the premium payers. Politicians can point to greater coverage as an accomplishment of theirs, and since payments are not coming from tax payers but rather from premium payers, politicians can also point out that the government spending and the tax burden was not increased, laying the blame of ever higher premiums on the shoulders of the health insurers and HMOs. The politicians are ordering greater coverage, but someone else is paying for it off budget.

What differs with government health single-payer plans or nationalized plans is that it becomes clear that the politicians are responsible for the costs they no longer have private firms on which to lay the blame for mounting costs. Then, they act much like the HMO Helen Hunt faced in “As Good as It Gets,” but now without competition. Then we start to see both tough choices and questionable choices being made. For instance, this summer stories (see these at Fox and KATU, Portland, OR) began to pour out of Oregon of cancer patients being denied chemotherapy, but offered physician assisted suicide instead, because easing the pain and bringing about earlier death of patients too costly to treat is the right thing to do.

So it goes.

Then there is this recent story from Britain about Baroness Warnock, a medical ethicist and an advisor to the British government, who has even suggested that dementia patients may have a “duty” to die.

She insisted there was “nothing wrong” with people being helped to die for the sake of their loved ones or society. The 84-year-old added that she hoped people will soon be ‘licensed to put others down’ if they are unable to look after themselves. And so it goes. And Welcome to the Monkey House.

-MC