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    Health Care Insight

    Oct 4 • Demand, Supply, and Markets, Government, Households, Macroeconomic Measurement, Regulation • 341 Views

    Perhaps it all began when President Lyndon Johnson called Wilbur Mills, chairman of the House Ways and Means Committee. “Wilbur, I’ve just been looking through the polls here, and I’ve only got a few weaknesses, and the worst of them is that I’m not doing anything for the old folks. I need some help from you.” The result? During 1965 Congress passes Medicare Parts A and B.

    Fast forward to 2010 and health care spending that far exceeds what Congress originally projected. Why? Through an excellent 2 week series, The Incidental Economist concisely explains where we spend and “what makes it so expensive”. In a short period of time, you will be able to gain considerable insight.

    No, they say, obesity is not the problem. Instead, they look at inpatient and outpatient care, drugs, administration and insurance, investment in health, and health care workers. Then, areas of underspending and red herrings precede their conclusion.

    For each component, they provide 2 or 3 paragraphs with basic facts and a summary graph. Discussing inpatient care, they point out that, at the hospital, we actually spend less than other comparable countries. While each day costs more, we stay there for a shorter time period. However, once we are at home, as 41% of all health care outlays, outpatient care propels spending. Moving through big pharma, bureaucracy, and health care workers, some facts are surprising. Interestingly, goods and services that we privately pay for are the focus of their underspending discussion.

    At the end of each day’s entry they say, “None of this proves that this money is wasted or fraudulently taken. Nor am I saying that we shouldn’t spend more money than other countries. But this is money that goes above what you’d expect us to spend based on our greater wealth. We should at least be able to account for and explain this increased spending in some way.”

    The Economic Lesson

    Health care spending is close to 17% of GDP. However, the opportunity cost of health care is far more than dollars. The cost is the missed opportunities to spend some of that money elsewhere, or, instead, to save it.

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    Inflation Stories

    Oct 3 • Demand, Supply, and Markets, Economic History, Money and Monetary Policy • 428 Views

    Arrive at a supermarket at the same time everyday? Require cash instead of credit?  Stop making beer? Why?

    The answer to each question is INFLATION.

    We are told that the Fed is always worried about inflation. If you know that you should worry too but were not really sure why, I recommend a recent NPR Planet Money podcast about Brazil. 

    During the 1950s, Brazil printed a lot of money to pay for building Brazilia, their new capital. With more currency circulating, too many Cruzeiros were chasing too few goods and inflation developed. Expecting it to continue, businesses raised prices, workers wanted higher wages, and consumers made purchases sooner. The result? Price and wage hikes accelerated. Finally, by the early 1990s, according to Planet Money, the monthly inflation rate was 80%. That meant that during 1 month, the price of a $1.00 carton of eggs would become $2.00.

    Out of control inflation is like a virus that multiplies. Responding, supermarkets have to reprice items daily. Knowing that food will get new price stickers at 9:00 each day, shoppers arrive at 8:30. You can see why businesses would avoid giving credit. By the time they got paid, the purchase price would have changed substantially. Similarly, one Brazilian beer maker stopped production because the connection between his costs and pricing became impossible to calculate. 

    According to Johns Hopkins economist Steve Hanke, in Zimbabwe, with a daily inflation rate of 98% and a monthly rate of 79,600,000,000%, it took 24.7 hours for prices to double during November, 2008. However, Hungary holds the record with a daily inflation rate of 195% during July, 1946.

    The Economic Lesson

    Textbooks say that inflation has three basic causes. 1) Too many dollars chasing too few goods is called “demand pull” inflation. 2) When the cost of land, labor, and/or capital rises, we have “cost push” inflation. 3) Inflation also can result when one item that is central to an economy, such as oil, becomes more expensive.

    With an inflation rate that is now close to 5%, Brazil has been controlling its causes.

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  • More Deja Vu

    Oct 3 • Economic Debates, Economic History, Government • 284 Views

    With the NY Times saying, “…Britain Keeps Welfare For the Well-Off,” the original Social Security debate comes to mind.

    Appointed by FDR in 1934, the Social Security Task force had an Old Age Security Group. Pushed by 11 states that already had old age insurance, the Roosevelt Administration felt pressure to act. They had to decide who to cover, how to implement the program, and how to pay fo it.

    One debate focused on whether the program should be universal. Predicting that a broader program would generate more current and future support than one that solely targeted the needy, they opted for eventual universal coverage.

    In the U.K. and here we still face the same dilemma. As a society, are we drawn together if we all share the same safety net? Or, have entitements become so expensive that differentiating payers and recipients is more important than unity?

    The Economic Lesson

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    Fiscal Commission Deja Vu

    Oct 2 • Government • 322 Views

    On Amazon (“gift wrap available”), you can purchase the 1995 “Final Report to the President” of the “Bipartisan Commission on Entitlement and Tax Reform”. During February, President Obama announced the creation of the National Commission on Fiscal Responsibility and Reform. The old and new commissions have a lot in common.

    I actually have a copy of the 1995 report on my bookshelf and just read its 269 pages. My conclusion? Nothing has substantially changed. In 1995, they said that Social Security expenditures would exceed Social Security tax revenue in 2013. The current projection is 2014. They said the system would have no trust fund money left in 2029. The current projection is 2037. Even one of the names is the same. Senator Alan Simpson was on the original commission and now is a co-chair of the current one.

    Because many of the facts have not changed, their solutions remain viable. Reflecting timeless political realities, the 32 members of the commission could not agree. Consequently, the report included general conclusions, policy suggestions, and reports from committee members. In addition, the staff presented 3 policy packages ((pp. 169-175). 1) “No Tax Changes”  so benefits would decrease. 2) “Minimize Benefit Reductions” so taxes would rise. 3) A “Blended Approach” which combines benefit cuts and tax increases.

    As was true 15 years ago, because discretionary items like education, space, and justice represent a small proportion of all federal spending, the 2010 commission will have to focus on mandatory spending which takes us to Social Security, Medicare, and Medicaid. Will the Congress and the President respond now as they did 15 years ago?

    The Economic Lesson

    Specifically defined, federal fiscal policy refers to taxing, spending, and borrowing. It involves the federal deficit which is the shortfall between annual spending and revenue. The federal debt is the total amount that the U.S. government owes.

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    The Big Tradeoff

    Oct 1 • Businesses, Government, Households, Macroeconomic Measurement • 1544 Views

    During the 2008 presidential campaign, when asked who is rich, John McCain jokingly said the dividing line was $5 million while Barack Obama said $150,000. Now, referring to proposed tax legislation, President Obama says that a family earning $250,000 is rich and should not get a Bush tax cut extension.

    Some history: The year was 2001 and the nation was in a recession when the Congress passed the largest tax reductions in 20 years. Impacting such areas as income, estate, and capital gains taxes, selected parts of the law were scheduled to expire on December 31, 2010.

    Here we are and what to do? Taxes are all about income redistribution. Economist Arthur Okun has said that we should consider Equality and Efficiency: The Big Tradeoff. If we promote equality, we will have more income redistribution through taxes, more fairness, and a common living standard. However, economic efficiency will suffer and our economic pie will grow more slowly. By contrast, economic competition leads to more efficiency, more entrepreneurial energy, more economic growth and a bigger pie. And, is it fairer to be able to keep more of what you earn?

    Yes, there are countless other issues. They include the deficit, income inequality, innovation, the role of government, defining who is rich, and the unemployment rate. But still, I wonder whether it all comes down to the side you take for “the big tradeoff”.

    The Economic Lesson

    One way to look at U.S. income distribution is a Lorenz Curve. Created by statistician Max Lorenz, the Lorenz Curve divides the total number of U.S. families into 5 equal groups. Then, Lorenz used coordinates to show how much of the total income each fifth of families earns. For example, on a graph a dot at (20,20) would mean that 20% of all families received 20% of the income. Continuing the same idea, we could place a dot at (40,40), (60,60), (80,80) and (100,100). The result would be a straight line reflecting totally equal income throughout that society. Displaying inequality, the actual U.S. curve for 2007 is bowed to the right.

    Arthur Okun said that when we try to affect income inequality by taxing the more affluent, we have a “leaky bucket” problem. Assume, for example, that the “rich” pay a $100 tax. Society will benefit from less than $100 because of administrative distribution costs and skewed spending incentives.


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