Milton Friedman: government deficits as taxation and the unlikely event of government debt financed at a zero bound interest rate

"What we call a deficit is a form of taxation. It is a very bad form of taxation, but it is a form of taxation. However, it does have some good features. The deficit is the only thing that is keeping spending from going up even faster. Moreover, I do not know of any component of government expenditures that does less harm than the payment of interest. If interest rates tomorrow were zero so that government did not have to pay any interest, what would happen to the money it saved? Do you think it would reduce the deficit? You are kidding yourself." 


- Why Government is the Problem, Milton Friedman, Hoover Institute Press Publication, Essays in Public Policy No. 39, Q&A session, pg. 17



Guess what? Friedman's observation is spot on as interest rates are currently near zero and he predicted exactly what would happen.

Public Choice Theory: an eight minute primer.

E15 and E85 Fuel Blends: Voided Warranties from a Long List of Auto Manufactures

Foodborne Illness & Plastic Bag Bans

Milton Friedman Case Against Equal Pay for Equal Work

What Do Prices "Know" That You Don't?

Milton Friedman - Myths That Conceal Reality

After the Affordable Care Act? After Obamacare? Part Five: “bending the cost curve” in health-care means removing supply-side limits and allowing robust competition.

 

Reviewing parts one, two, three and four of this series, John Cochrane professor of finance at the University of Chicago Booth School of Business wrote a recent essay entitled After ACA: Freeing the market for health care. The essay is very interesting as it makes the case of the need for decoupling health care from health insurance when discussing the demand and supply for health care and insurance merely being a mechanism to address catastrophic losses. Others have also pointed out the need to decouple the two concepts, however Cochrane does so in such a way that points out that the supposed market failure in health care is directly related to government failure in the realm of health care due to government lead market distortions on both the demand and supply side of health care.

Subsidies, price fixing schemes and regulation to supposedly reduce price vs. robust supply-side competition

A question that begs asking is why would the taxpayer subsidize computerized medical records as called for the Affordable Care Act (ACA)? Why were computerized medical records not already computerized by the current health-care sector suppliers on their own accord?

“On reflection, it’s amazing that computerizing medical records was part of the ACA and stimulus bills. Why in the world do we need a subsidy for this? My bank computerized records 20 years ago. Why, in fact, do doctors not answer emails, and do they still send you letters by post office, probably the last business to do so, or maybe grudgingly by fax? Why, when you go to the doctor, do you answer the same 20 questions over and over again, and what the heck are they doing trusting your memory to know what your medical history and list of medications are? Well, this is a room full of health policy wonks so you know the answers. They’re afraid of being sued. Confidentiality regulations, apparently more stringent than those for your money in the bank. They can’t bill email time. Legal and regulatory roadblocks.

　

So, medical records offer a good parable: rather than look at an obvious pathology, and ask “what about current law and regulation is causing hospitals to avoid the computer revolution that swept banks and airlines 20 years ago,” and remove those roadblocks, the government adds a new layer of subsidies and contradictory legal pressure.” (1)



What happens to robust supply-side competition when legislation and consequential regulations become merely discretionary powers?

“The impediments to supply-side competition go far beyond formal legal restrictions. Our regulatory system has now evolved past laws, past simple, explicit, and legally challengeable regulations, to simply hand vast discretionary power to officials and their administrative bureaucracy, either directly (“the secretary shall determine..” is the chorus of the ACA) or through regulations vague enough to let them do what they want. Witness the wave of discretionary waivers to ACA handed out to friendly companies. Those administrators can easily be persuaded to take actions that block a disruptive new entrant, and with little recourse for the potential entrant. (Lobbying government to adopt rules or take actions to block entrants is legal, even if those actions taken directly would violate anti-trust laws, under the Noor-Penington doctrine.)” (2)

If one wants to drive down the cost of health-care then one must create an environment that fosters robust supply side competition. Hence Cochrane offers a simple rule for what would seem to be a complex world:

“So, what’s the biggest thing we could do to “bend the cost curve,” as well as finally tackle the ridiculous inefficiency and consequent low quality of health-care delivery? Look for every limit on supply of health care services, especially entry by new companies, and get rid of it.” (3)

Changing gears for a moment and considering the deployment of complex rules for what appears to be complex, we can consult Richard Epstein’s book by the title of none other than Simple Rules for a Complex World. Epstein argues that the intuitive position is when one us faced with complexity then complexity requires complex rules. The result is to create complex rules that have burdensome administration costs and that such complex rules leave James and Jane Goodfellow with no earthly idea on how to interpret the rules. Epstein’s counterintuitive proposition is that simple rules lower administrative prices and costs and yield the same or better benefit. (4)

Moreover, Epstein points out that legislation spawning regulation causes rent seeking opportunities at each step of regulation hence the barriers to entry mentioned by Cochrane. Further, the regulations in and of themselves create rent seeking by an army of attorneys to interpret the rules, at a price, for James and Jane Goodfellow.

Both Epstein and Cochrane point out that over time increased administration price and cost, across entire economies and specific sectors, accumulate into explosive levels that create major drag.

Regarding health-care administrative price, one may find insight in the following:

“….administrative costs in our disintegrated U.S. system are $1059 per capita. The fact that this is an astonishing thirty-one percent of total health care expenditures itself suggests that excessive administrative costs are being imposed.” (5)

Cochrane goes onto to point out ACA’s approach to administration price and removing barriers to entry to foster robust supply-side competition is in fact to ramp up the price of administration and to continue with barriers to entry as the status quo:

"Now, this is of course not the way of current policy. The ACA and the health-policy industry are betting that new regulation, price controls, effectiveness panels, “accountable care” organizations, and so on will force efficiency from the top down. And the plan is to do this while maintaining the current regulatory structure and its protection for incumbent businesses and employees.

Well, let’s look at the historical record of this approach, the great examples in which industries, especially ones combining mass-market personal service and technology, have been led to dramatic cost reductions, painful reorganizations towards efficiency, improvements in quality, and quick dissemination of technical innovation, by regulatory pressure.

I.e., let’s have a moment of silence.

No, we did not get cheap and amazing cell phones by government ramping up the pressure on the 1960s AT&T. Southwest Airlines did not come about from effectiveness panels or an advisory board telling United and American (or TWA and Pan AM) how to reorganize operations. The mass of auto regulation did nothing to lower costs or induce efficient production by the big three.

When has this ever worked? The post office? Amtrak? The department of motor vehicles? Road construction? Military procurement? The TSA? Regulated utilities? European state-run industries? The last 20 or so medical “cost control” ideas? The best example and worst performer of all,…wait for it...public schools?

It simply has not happened. Government-imposed efficiency is, to put it charitably, a hope without historical precedent. And for good reasons.

Regulators are notoriously captured by industries, especially when those industries feature large and politically powerful businesses, with large and politically powerful constituencies, as in health insurance or as in most cities’ hospitals. In turn, regulated industries quickly become dominated by large and politically powerful businesses. See banks, comma, too big to fail. (Several insurance companies were bailed out in the financial crisis, so too-big-to-fail protection is not a distant worry.) This is not to say that regulators are not well-meaning and do not put great pressure on many industries. But the deal, “you do what we want, we’ll protect you from competition” is too good for both sides to resist.

Needless to say, price controls have been an unmitigated disaster in every case they have been tried. Long lines for gas in the 1970s are only the most salient reminder. Their predictable result is, vanishing supply. Try finding a doctor who will take new Medicare or Medicaid patients.

The current regulatory approach is not really well described as simple price controls, e.g. $3 per gallon of gas, but rather as fiddling with a payment system of mind-numbing complexity and endlessly discovered unintended consequences. The past record of “cost control” and “incentive” efforts should warn us of how likely adding more complex rules is to work. It seems instead to be a challenge to the next generation of planners.” (6)

　Notes:

(1) After the ACA: Freeing the market for health-care, John H. Cochrane, 10/08/2012, pg. 7.

(2) Ibid, pg. 8

(3) Ibid.

(4) Simple Rules for a Complex World, Richard Epstein.

http://www.amazon.com/Simple-Rules-Complex-Richard-Epstein/dp/0674808215/ref=sr_1_1?s=books&ie=UTF8&qid=1357997966&sr=1-1&keywords=simple+rules+for+a+complex+world

(5) Why We Should Care About Health Care Fragmentation, Einer Elhauge, pg. 5.

(6) After the ACA: Freeing the market for health-care, John H. Cochrane, 10/08/2012, pg. 9.

　

　

After the Affordable Care Act? After Obamacare? Part Four: Scale and integration vs. a fragmentation model

Reviewing parts one, two and three of this series, John Cochrane professor of finance at the University of Chicago Booth School of Business wrote a recent essay entitled After ACA: Freeing the market for health care. The essay is very interesting as it makes the case of the need for decoupling health care from health insurance when discussing the demand and supply for health care and insurance merely being a mechanism to address catastrophic losses. Others have also pointed out the need to decouple the two concepts, however Cochrane does so in such a way that points out that the supposed market failure in health care is directly related to government failure in the realm of health care due to government lead market distortions on both the demand and supply side of health care.

　

　

Scale and integration vs. a fragmentation model

　

Although many health-care systems seem large and large in such a way to capture the positive aspects of scale, these health-care systems are in fact fragmented and do not come close to producing scale. Cochrane points to Harvard law professor Einer Elhauge’s paper The Fragmentation of US. HealthCare and makes this observation:

'Einer Elhauge9 examines “fragmentation” of medical care in detail, the fact that even in hospital settings care is bought essentially from different doctors and specialists rather than in an integrated manner, as, say airline travel is, where you do not separately purchase pilot, flight attendant, fuel and baggage services. My examples suggest a consolidation, integration, and corporatization of overall health service provision, as restaurant chains displace individual stores. What stops this defragmentation? He surveys research concluding that nothing in the nature of health care seems to require this structure, as hospitals in other countries have salaried doctors, and concludes instead (p.11):
 

“The dominant cause of fragmentation instead appears to be the law, which dictates many of the fragmented features described above and thus precludes alterative organizational structures.”
He lists a long string of legal impediments, including Medicare reimbursement rules, laws against corporate medicine and tort doctrines. Referring to private insurance (p.12):

“…State laws generally make it illegal for physicians to split their fees with anyone other than physicians with which a physician is in a partnership. More important, alternative payment systems, such as paying a hospital (or other firm) to produce some health outcome or set of treatments, would make sense only if it has some control over the physicians and other contributors to that outcome and treatments. And other laws preclude such control, as detailed in the chapters by Professors Blumstein, Greaney, Hyman, Madison, Cebul, Rebitzer, Taylor, and Votruba. The corporate practice of medicine doctrine provides that firms—whether hospitals or HMOs—cannot direct how physicians practice medicine because the firms do not have medical licenses, only the physicians do. Although some states allow hospitals to hire physicians as employees, that change in formal status does not help much if the employer cannot tell the employee what to do. Even if the law did not prohibit such interference, tort law generally penalizes firm decisions to interfere with the medical judgments of individual physicians, making it unprofitable to try, as Professor Blumstein observes. Further, hospital bylaws usually require leaving the medical staff in charge of medical decisions, and those bylaws are in turn required by hospital accreditation standards and often by licensing laws. By dictating autonomy for the various providers involved in jointly producing health outcomes, these rules largely dictate separate payments to each autonomous provider.

Private insurer efforts to directly manage care have likewise been curbed by the ban on corporate practices of medicine and the threat of tort liability. In addition, states have adopted laws requiring insurers to pay for any care (within covered categories) that a physician deemed medically necessary, banning insurers from selectively contracting with particular providers, and restricting the financial incentives that insurers can offer providers.” ‘ (1) (2)

Hence scale can’t be achieved and fragmentation is the rule due to, once again, politicos through the mechanism of government writing legislation spawning regulation resulting in government failure. Therefore rather than promoting scale and integration as a price reducer we end with a scheme of fragmentation as a cost inducer.

It gets better, these seemingly large hospitals and health care systems that would seem to produce scale but actually are highly fragmented are based on non-profit models:

“My cost-cutting examples are all for-profit companies. About 70% of hospitals and 85% of health care employment is in non-profits, whose legal and regulatory treatment protects muchinefficiency from competition.

If United didn’t have to pay taxes, Southwest’s job would have been that much harder.

Maybe for-profit companies pay too much attention to stock prices. But non-profits can go on inefficiently forever, with no stockholders to complain. The whole point of a non-profit is to pursue goals other than economic efficiency.

More importantly, if a for profit company is inefficiently run, another company or a private equity firm can buy up the stock cheaply, replace management, and force reorganization. Non-profits (and their management especially) are protected from this “market for corporate control.” (3) (4) (5)

The price nitwitery is astounding! You have a promoted model of fragmentation delivered through a non-profit model protecting inefficiency. However, the non-profit aspect is being eliminated to some extent by hospital mergers where for-profit merge with non-profits or non-profits change to for-profit. But even this aspect become impeded by government failure. Cochrane writes:

“Recognizing some of these pathologies, there is a wave of mergers, and transfers between for-profit and not for-profit status. But there is lots of gum in the works. When a nonprofit is sold or converts to for profit, the state attorney general and courts can weigh in on the sale; legally to ensure that the proceeds benefit a charitable cause related to the non-profit’s original mission. This is a great opportunity for competitors to block the change.

The FTC is ramping up antitrust action against hospital mergers. Hospitals need economiesof scale for expensive, specialized modern medicine and to comply with the avalanche of regulatory and insurance regulation. The FTC worries about local monopolies able to raise prices, especially given the inelastic demand by insurers and government reimbursement. So here we have the government forcing small size in order to boost competition with one hand, stopping entry to protect hospitals from competition with another, trying to force larger “networks” through “Affordable Care Organizations” to obtain the needed economies of scale with the third, but laws preserving doctor independence with the fourth.” (6) (7) (8)


A major price driver in health care is none other than government. More succinctly, politicos through the mechanism of government have created legislation spawning regulation that drives up health care prices. Hence one is looking straight into the eye of government failure. Further the Affordable Act is based upon a price fixing scheme. Think of that aspect of price fixing. Its absurd as politcos have passed legislation to price fix the very prices they themselves have driven astronomically upward.

Maybe health care needs a waiver from government.

Notes:

(1) After the ACA: Freeing the market for health care, John H. Cochrane, October 18, 2012.

(2) The Fragmentation of U.S. Health Care, Einer Elhauge.

(3) After the ACA: Freeing the market for health care, John H. Cochrane, October 18, 2012.

(4) “Non-Profit Production and Industry Performance”, Journal of Public Economics, Lakdawalla, D., and T. Philipson.

(5) “Agency Problems and Residual Claims” Journal of Law and Economics, Fama and Jensen.

(6) After the ACA: Freeing the market for health care, John H. Cochrane, October 18, 2012.

(7) Horwitz, Jill R. 2012, “State Oversight of Hospital Conversions: Preserving Trust or Protecting Health?” The Hauser Center for Nonprofit Organizations, The Kennedy School of Government.

(8) “Regulators Seek to Cool Hospital-Deal Fever” Wall Street Journal, 03/18/2012.