Thursday, August 27, 2009

Socialized Medicine: decisions on cost effective procedures

In the on going debate over Health-Care Reform aka Health Insurance Reform you have undoubtedly heard the reference to Death Panels. Further you have heard that a board of faceless bureaucrats would make decisions if a procedure was cost effective for patients and in particular elderly patients.

The argument is based on other Socialized Medicine plans that function in other countries. That indeed decisions are made regarding the cost/benefit of procedures and procedures are denied in the course of every day events in Socialized Medicine.

What does not get any attention is: what is the cost/benefit analysis? In other words, how do they determine if a procedure is cost effective and what is the benefit? What cost/benefit determines denial of a procedure?

You might want to look to Dr. Solomon S. Huebner's and his development of The Human Life Value Concept.

The Human Life Value Concept was an attempt to measure the income/economic loss sustained by a household due to premature death of a wage earner. The value was used to determine Life Insurance needs.

However, The Human Life Value Concept was adopted by Trial Attorneys in wrongful death cases among other legal cases. The Human Life Value Concept has found its way into many of the Social Sciences.

In a nutshell The Human Life Value Concept works as follows: if John Q. Public is 30 years old, he has 35 more working years (65 normal retirement age). He makes $50,000 per year. The income is projected over the next 35 years with an inflation factor for pay raises. Then the resulting value is reduced to the current value of the future benefit.

Hence John/Jane Q. Public is reduced to a dollar and cents value. Remember, this dollar and cents value was for calculating Life Insurance needs. However, the Human Life Value Concept has found its way into other Social Sciences and is used in many other ways than the original needs for Life Insurance that Huebner discussed.

One can quickly see that The Human Life Value Concept, with income equal, is going to yield a higher value for the younger worker than the older worker. Then comes the retired worker. Of course there is the 70 year old retiree and the 87 year old retiree. What arbitrary calculation of Human Life Value do you assign to the retired worker? Is the 70 year old some how more valuable than the 87 year old?

The Human Life Value works well in Life Insurance for calculating the need for Life Insurance. When you take the concept and move it out of the realm of Insurance/Economics and into other Social Sciences its is no longer an Economic number, it becomes a Political-Economy number.

Saturday, August 22, 2009

Health-Care Rationing and Socialized Medicine: Price Distortions, Demand Shock, and Overutilization

Will Socialized Medicine cause health-care rationing?

The economics are as follows:

(1) the attempt to limit price (health care price controls) then distorts price,

(2) demand and supply, for any good or service in the free market, is rationed by "price". That is, demand and supply intersect at price,

(3) if you distort price, then demand and/or supply become distorted,

(4) when demand and supply are not allowed to intersect at price, then price is not the natural rationing equilibrium,

(5) if price is not the established equilibrium of demand and supply and an artificial equilibrium is established through price controls, then the result is true rationing.

Introducing between 19-47 million new consumers to the demand curve of health care services, the supply of health care services then becomes swamped as the supply curve is constant. With a demand shock, and supply constant, price would rise as the rationing agent. However, price will not be allowed to rise. If price can not rise to act as the rationing agent, then true rationing occurs.

The 19-47 million new consumers added to the demand side of Health Care add yet another effect: over utilization. If you previously have had no health care coverage, you likely have pended-up-demand. Suddenly you want certain items looked into that you have put off.

Over utilization also occurs when part of the 19- 47 million are receiving free or heavily subsidized health care. The perceived free or low cost access causes over utilization.

The current Health Care Reform Bill also mandates low deductibles and low co-pays. Low deductibles and low co-pays create an environment of over utilization.

Hence Price Distortions, Demand Shock and Over Utilization will cause true rationing.

Friday, August 14, 2009

Economic Recovery?

One might be confused that the Federal Reserve, many Private and Public Sector Economists, and many Pundits are reporting the Recession is over and Recovery has begun.

The question comes to mind: how in the world can a Recovery be underway with 9.4% published Unemployment rate (if you correlate the unprecedented 18% decline in Federal Tax Revenue with Unemployment, you likely get a real Unemployment rate of 15%) ?

The answer is: Jobless Recovery.

"Jobless Recovery" is counterintuitive. How can you have a Recovery without Jobs? Doesn't Recovery mean people are going back to work?

Yes, a Jobless Recovery is counterintuitive. However, it can be explained as follows:

(a) employed Human Capital, Physical Capital, and Financial Capital are recovering,

(b) unemployed Human Capital, Physical Capital, and distorted/constrained Financial Capital are not recovering.

Wednesday, August 5, 2009

Unemployment Part 4: Federal Tax Revenue, Unemployment and the Laffer Curve

Below are two links to stories regarding the unprecedented drop in Federal Tax Revenue (down 18%). Be prepared to see a second story soon regarding the same decline in State Tax Revenues.

Here are some observations:

(1) the published unemployment rate is 9.5%. The 9.5% rate is highly suspect. The published rate of 9.5% does not count the Self Employed or Contract Labor beyond the other suspect assumptions made within the 9.5% published unemployment rate,

(2) many economists say the real unemployment rate is north of 15%,

(3) An 18% drop in tax revenues correlates with a 15% unemployment rate not a 9.5% unemployment rate.

Upon further review, take a look at the graph in the first link above. Click the graph for a larger view. Look closely at 1984-1989. Note the tax revenue increase. Then think about Art Laffer and Ronald Reagan tax cuts.

To review the Laffer Curve please see the following links for information:

Here is the question you need to ask yourself: Is the Federal Government's proposals to raise taxes going to further reduce revenue? Further increase unemployment?

Consider these points:

(1) the Laffer Curve clearly exists (taxation/revenue equilibrium). Reduced tax rates in the Reagan administration, counter intuitively, increased tax revenues as the "economic effect" of lower taxes trumps the "mathematics" of lower taxes. In other words, the tax reductions were actually a movement toward tax/revenue equilibrium,

(2) with the Federal Government currently experiencing an 18% reduction in tax revenues while chalking up record spending leading to record deficits, the reaction of Government will be to raise taxes,

(3) the increased taxes will create movement on the Laffer Curve,

(4) the prediction of the Laffer Curve, given increasing taxes in the current environment, would be to create a tax rate completely out of equilibrium. Meaning the tax revenue will decrease further (the economic effect will trump the mathematics of a higher tax rate).

(5) higher tax rates reduce consumption by businesses and consumers (less disposable income) leading to further unemployment,

(6) higher tax rates are a disincentive to Private Capital Formation which leads to the creation of Private Sector Jobs.

Saturday, August 1, 2009

Unemployment Part 3: Reading the Stitches on a Fast Ball

The Council of Economic Advisors, which is headed by Summers, Romer, Bernstein and Goolsbee......with the help of Congress, have apparently discovered an old economic theory: Unemployment.

Let us review:

(1) Simultaneously deploying the theory of Keynesian Deficit Government Spending and the theory of Quantitative Easing, in a current environment of High Existing Government Debt (remember both theories were developed in an environment of zero or low government debt), it becomes a very dicey project (Japan 2001-2006). Japan is experiencing a 20 year down turn/recession,

(2) It would be extremely important, if deploying Keynesian Deficit spending:

(a) never base the plan on Political-Political, rather base the plan on Political-Economy,

(b) use the historical format of Infrastructure Spending rather than Social Engineering,

(3) If one deploys Keynesian Deficit Government spending, then at the very least understand what Keynes said: Deficit Government Spending is temporary until the Private Sector Recovers.

(4) Exactly what policies exist to create incentives for Private Capital Formation which leads to Private Sector Jobs? Would that be the specter of much higher Federal and State personal and business taxes? Tax and Trade (energy tax)? Socialized Medicine (tax)? Over Regulation (reduce profits at the margin)?

(5) The Unemployment Statistic published from the Department of Labor does not include the Self Employed nor Contract Labor which make up 40% of the Workforce. Hence the Unemployment rate is North of 15%.

(6) Remember Capital is Unemployed too. Capacity Utilization is at 65%.

You decide. Are (1) - (6) job creators?