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April 09, 2010

A Taste of Things to Come

It's all about human psychology. Eighty years ago, people were allowed to buy stocks with 10% margin and this resulted in the stock market crash. Just a few years ago, and even today, people were allowed to buy houses with 0% margin and we had a housing bubble and crash. Why is this so hard to understand?

It's the same hairless ape in both circumstances. In 60 to 80 years, there will be another crash in something else.

- James Morrison, WSJ

Albert Einstein once defined insanity as "...doing the same thing over and over again and expecting different results." Applying Einstein's maxim to the Obama administration's recent legislative "victory" leads to some uncomfortable and long overdue conclusions:

The nation’s fiscal path is “unsustainable,” and the problem “cannot be solved through minor tinkering,” the head of the Congressional Budget Office said Thursday morning.

Doug Elmendorf, best known for arbitrating the costs of various health care proposals, added his voice to a growing chorus of economic experts who predict dire consequences if political leaders don’t scale back spending, increase taxes or both — and soon.

Elmendorf noted a recent CBO report that pegged an increase in the public debt from $7.5 trillion at the end of 2009 to $20.3 trillion at the end of 2020 if President Barack Obama’s fiscal 2011 budget were to be implemented as written. As a percentage of gross domestic product, the debt would rise from 53 percent to 90 percent, CBO forecasted. The last time the percentage was that high was right after World War II.

That last observation is critical because not all debt is created equal, nor are all debt levels equally sustainable. Unlike our present deficit, America's post WWII debt resulted from temporary discretionary spending. Because there was no requirement to maintain artificially high wartime spending, it posed far less of a threat to the stability of the economy. By comparison, our current debt consists primarily of mandatory, permanent spending on entitlement programs. This isn't like a family temporarily going into debt to finance a one time, non-recurring purchase. It's more like a family buying a house they can't afford with a balloon mortgage:

spending_discret.jpg

When you strip such decisions of political doublespeak and technical jargon, it's easy to see the root of the problem: the human tendency to want something for nothing. People want to buy things they can't afford. They have a right to health insurance policies but don't want the tiresome necessity of earning the money to pay for them.

They want to know why, oh why! politicians continue to promise (and try to deliver) exactly what voters have demanded of them? How could government "let" housing prices fall? It's always someone else's fault, and never our own.

During the recent health care debate, the one thing that united people on both sides of the debate was the "need" to prevent greedy insurers from denying coverage for pre-existing conditions. Thanks to the state of Massachusetts, we now have yet another object lesson in the folly of expecting something for nothing:

Thousands of consumers are gaming Massachusetts’ 2006 health insurance law by buying insurance when they need to cover pricey medical care, such as fertility treatments and knee surgery, and then swiftly dropping coverage, a practice that insurance executives say is driving up costs for other people and small businesses.

In 2009 alone, 936 people signed up for coverage with Blue Cross and Blue Shield of Massachusetts for three months or less and ran up claims of more than $1,000 per month while in the plan. Their medical spending while insured was more than four times the average for consumers who buy coverage on their own and retain it in a normal fashion,...

The typical monthly premium for these short-term members was $400, but their average claims exceeded $2,200 per month. The previous year, the company’s data show it had even more high-spending, short-term members. Over those two years, the figures suggest the price tag ran into the millions.

How is government control of private industry affecting Massachusetts insurers? Here again, reality provides a stark contrast to the "Yes, we can!" school of something for nothing political rhetoric:

This week it became impossible in Massachusetts for small businesses and individuals to buy health-care coverage after Governor Deval Patrick imposed price controls on premiums. Read on, because under ObamaCare this kind of political showdown will soon be coming to an insurance market near you.

The Massachusetts small-group market that serves about 800,000 residents shut down after Mr. Patrick kicked off his re-election campaign by presumptively rejecting about 90% of the premium increases the state's insurers had asked regulators to approve. Health costs have run off the rails since former GOP Governor Mitt Romney and Beacon Hill passed universal coverage in 2006, and Mr. Patrick now claims price controls are the sensible response to this ostensibly industry greed.

Yet all of the major Massachusetts insurers are nonprofits. Three of largest four—Blue Cross Blue Shield, Tufts Health Plan and Fallon Community Health—posted operating losses in 2009. In an emergency suit heard in Boston superior court yesterday, they argued that the arbitrary rate cap will result in another $100 million in collective losses this year and make it impossible to pay the anticipated cost of claims. It may even threaten the near-term solvency of some companies. So until the matter is resolved, the insurers have simply stopped selling new policies.

Why does it surprise us when a government that has no idea how to pay its own bills prescribes financially disastrous policies for the private sector? But more importantly, why do so many Americans accept statements from politicians that fly in the face of common sense?

The inconvenient truth is that a significant portion of the voting public wants to believe they can have something for nothing. That belief is so powerful that even repeated encounters with the clue bat of history have not been able to dislodge it.

It is notable that both parties in American politics today champion what they like to call "freedom". But without individual responsibility and accountability, there is no real freedom. When government attempts to shield individuals from the consequences of their freely made decisions, it can do so only by shifting the risk of bad choices from the actor to his fellow citizens.

The purpose of the social contract is to protect individuals from their fellow citizens. When government actively encourages citizens to prey upon one another, it has lost not only its original mandate, but any pretense to decency or justice.

Posted by Cassandra at April 9, 2010 07:44 AM

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Comments

"If something cannot go on forever, it won't."

-Herb Stein

Posted by: Grim at April 9, 2010 11:33 AM

Or, if you'd like to hear your namesake's take on it, she's still cursed by Apollo.

Posted by: Grim at April 9, 2010 11:35 AM

Interesting graph. The biggest thing that sticks out for me is that since 1964, absolutely nothing has succeeded in stopping the growth of entitlements. If the entitlement spending were to be graphed by itself, with no year marks, you would have difficulty telling which party controlled the Presidency or the Congress during any period. The only place that might not look like a steady slope would be the late '90s, where welfare reform (Democrat President / Republican Congress) looks like it managed to check the growth for a while. But ultimately, all that succeeded in doing was pushing back the day of reckoning a few more years.

As the caption says, the chart demonstrates vividly that entitlement programs run on autopilot. Which was likely the intent all along. We aren't notably different from the European governments; we are just a decade or so behind their curve. Once you get a significant percentage of the population with a direct vested interest in government growing without bound, that snowball is awfully hard to stop.

What I'd be interested in seeing is a graph, over that same time period, of what percentage of the U.S. population is receiving government benefits. I recall a stat that said that at some point early in the history of Social Security (might have been around 1950), there were 42 people paying in for every person who was collecting. Now the ratio is approaching 2 to 1. I've long said that Social Security is a Ponzi scheme. I'd now like to amend that statement: every government welfare program is a Ponzi scheme.

Posted by: Cousin Dave at April 9, 2010 11:53 AM

What I'd be interested in seeing is a graph, over that same time period, of what percentage of the U.S. population is receiving government benefits.

I just so happen to have that on a prior post. Coming up!

Posted by: Cassandra at April 9, 2010 12:05 PM

The ones who are getting "something for nothing" are the insurance companies themselves.

"Blue Cross CEO's pay rose 26%"

link:

http://www.boston.com/business/healthcare/articles/2009/02/28/blue_cross_ceos_pay_rose_26/


The gubmint is subsidizing these companies because they are supposed to use their large membership to negotiate better prices from medical providers and Big Pharma.


Of course, they are not doing that:

"AG finds clout of hospitals drives cost
State’s insurers pay twice as much to some providers"

link:

http://www.boston.com/news/local/massachusetts/articles/2010/01/29/attorney_general_says_clout_drives_up_health_costs/?page=1

From the article:

"Coakley’s investigators found that Massachusetts health care costs, which are growing by 7.5 percent annually, are mostly the result of rising prices, not patients getting more imaging tests, surgery, and other procedures. For one major insurer, provider price increases accounted for 80 percent of the total growth in medical expenses between 2006 and 2009."

That's why their rate increases were denied. They failed miserably in doing the one job they were supposed to do.

Medicare has proven they can negotiate prices effectively.

Cut out the middle man (i.e. private insurance companies) and costs will go down.

Posted by: Craig at April 9, 2010 12:29 PM

That's unlikely, Craig. The point of an insurance company as price negotiator is collective bargaining -- in other words, the insurance company is like a labor union in that way. Cut out that middleman, and you don't substitute the Federal government as a guarantor of our interests. Rather, you leave individuals lobbying the Federal government on the one side; versus the same hospitals whose power you cite as driving price increases.

The Congress has proven to be miserable at putting the interests of the public ahead of any organized lobby at all. It's impossible to imagine that we would benefit from removing the corporations, which are at least a third party powerful enough to balance against the hospitals. The government certainly cannot be trusted to do what's right for the people in the face of anyone with significant lobbying money.

Posted by: Grim at April 9, 2010 12:45 PM

Blue Cross is a non-profit.

As to this: "Medicare has proven they can negotiate prices effectively.", that's nonsense.

The fact is that price controls have had exactly the same effect with Medicare and Medicaid: physicians are refusing to accept Medicare/Medicaid. The net effect is to make health care harder to obtain.

Posted by: Cassandra at April 9, 2010 12:48 PM

"It's impossible to imagine that we would benefit from removing the corporations, which are at least a third party powerful enough to balance against the hospitals."

Corporate inspired civil liberties and freedom. A blasphemy upon the face of the Leftist dogma, Grim.

Posted by: Ymarsakar at April 9, 2010 01:18 PM

As I said, insurance companies were supposed to use their "corporate clout" to control costs.

They complained that they couldn't do it and now demand rate increases to pay for their failure.

Continue to fight for that-there "corporate inspired civil liberties and freedom", though. Sounds like a noble cause.

Posted by: Craig at April 9, 2010 01:38 PM

They complained that they couldn't do it and now demand rate increases to pay for their failure.

It's not like they can ignore the law like Congressional buddies some of us know.

Posted by: Ymarsakar at April 9, 2010 01:39 PM

They complained that they couldn't do it and now demand rate increases to pay for their failure.

Yes, Craig. It makes so much more sense to just order insurance companies to pay all claims regardless of whether their costs are covered by premiums.

That's first class thinking - are you by any chance a member of Congress?

Posted by: Cassandra at April 9, 2010 01:40 PM

As I said, insurance companies were supposed to use their "corporate clout" to control costs.
They complained that they couldn't do it and now demand rate increases to pay for their failure.

It doesn't work that way, Craig.

Prices are not independent of costs and insurers do not and never have had the ability to control the costs of independent service providers.

You need to read this:

http://www.villainouscompany.com/vcblog/archives/2009/10/why_price_contr.html

Posted by: Cassandra at April 9, 2010 01:49 PM

They complained that they couldn't do it and now demand rate increases to pay for their failure.

And your solution is to force them to operate at a loss?

Exactly how long do you expect them to last before they decide to close up shop, board up the windows, and go home?

Posted by: ¥û÷Åîñ Ģøńņăŋő at April 9, 2010 01:51 PM

Exactly how long do you expect them to last before they decide to close up shop, board up the windows, and go home?

Oh, we'll just pass another law Yu-Ain :p Or maybe Congress can repeal the law of supply and demand.

Posted by: Cassandra at April 9, 2010 02:01 PM

Actually, that's the ideal situation for the single-payer advocate: drive them out of business, and the government alone pays all the bills. They impose price controls on the hospitals at gunpoint.

Of course, as you say, price controls don't address the independent factor of what it actually costs to provide the service. So now it's the hospitals (and the doctors) who are closing up shop and heading home. Can't have that; so Congress passes a "bailout" to pay them the money that they would have just earned under the market system. If it moves, tax and regulate it until it stops; when it stops, subsidize it.

Of course, Congress will require the CBO to examine 'the effectiveness of price controls' without reference to the periodic bailouts; so, official numbers will show that the price controls have been a robust success!

Posted by: Grim at April 9, 2010 02:33 PM

The gubmint is subsidizing these companies because they are supposed to use their large membership to negotiate better prices from medical providers and Big Pharma.

Nup -- just the reverse. The subsidy was to make employee enrollment in MediCare C a more attractive option for those companies, thus allowing -- theoretically -- MediCare more clout in negotiating lower drug prices.

As to this: "Medicare has proven they can negotiate prices effectively.", that's nonsense.

MediCare has consistently shown it can't negotiate its way out of a wet paper bag.

Posted by: BillT at April 9, 2010 02:47 PM

Why does the Left, even though they believe God doesn't exist, keep trying to goad God into doing something drastic about their tiresome behavior.

Posted by: Ymarsakar at April 9, 2010 02:54 PM

It's like they keep trying to run off a cliff hoping for a miracle. That wouldn't be so bad, except that everybody else somehow got pulled along with them.

Posted by: Ymarsakar at April 9, 2010 02:55 PM

And somehow, it's always *our* fault that they keep trying to jump and it's *our* fault that we keep restraining them from jumping -- and when they do, it'll be all *our* fault that they did, and all *our* fault for not trying hard enough to keep them from jumping.

Posted by: BillT at April 9, 2010 05:33 PM

Great words Cass, and even with imbecilic liberal comments, great discussion. You truly run a classy joint.

As always, I am impressed!!!

Posted by: Kbob in katy at April 9, 2010 11:21 PM

"No freedom without individual responsibility" -- exactly. And no success without controlling human beings' powerful urge to engage in wishful thinking.

As Richard Feynman said, to create a successful technology, truth must take precedence over public relations, for nature cannot be fooled.

Posted by: Texan99 at April 10, 2010 10:45 AM

I was just thinking of another tragic tale related to all this liberalism...

A busload of liberals going to a CodePink rally went off the road and over a cliff. All on board perished.

The tragic part was that there were two empty seats.

Writers Note: Not that I wish evil upon code pink or any other left wing whackjob rabble. This was just for illustrative purposes.

Posted by: kbob in katy at April 10, 2010 04:28 PM

The sad thing is that they took the driver with them. And the bus that would have to be replaced, polluting the world more.

Posted by: Ymarsakar at April 10, 2010 06:26 PM

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