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    More Heath Care Thoughts

    Mar 2 • Thinking Economically • 183 Views

    Looking at yesterday’s Wall Street Journal editorial article on Indiana’s health care approach, I wondered why no one refers to incentive when assessing alternative legislation.

    Indiana offers a Health Savings Account (HSA) option to state employees.  Here is how it works:  In an account overseen by the employee, the state deposits $2750 for health care bills and pays the premium for the account.  Any money not used for health care belongs to the HSA participant.  If the entire account is used for health expenses, then the state will share additional health costs.  Maximum out-of-pocket is $8,000.  Increasingly popular, the HSA had a 70 percent sign-up this year.

    Indiana’s incentives had these results:
    1. People were more likely to use generic drugs.
    2. People visited physicians and emergency rooms 67 percent less frequently than those with traditional health care plans.
    3. Overall, it appeared that while participants sought necessary procedures and doctor visits, they also thought more about cost.
    4. Unused funds averaged $2,000 per employee.
    5. There is no evidence that appropriate health care is being sacrificed.

    Looking at Congressional proposals, I hope that someone will identify the incentives. By recognizing the impact of incentives, we can all decide whether we approve of how new legislation encourages us to act.

    The Economic Life
    At the heart of economics, incentives shape our behavior.  On the demand side of markets, buyers have the incentive to spend less.  On the supply side, producers have the incentive to charge more.  New laws will shape the behavior of buyers and sellers through the incentives they create.

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    Random Health Care Notes

    Mar 1 • Thinking Economically • 311 Views

    Last summer, at a Fourth of July picnic, a 75 year old great-grandmother, told by her doctor not to eat a hot dog because of its high sodium content, said, “I’m going to have a hot dog.  If I’m dead in the morning, I’ll never know.”

    Other random health care notes…
    1. A recent study concluded that Medicare costs are skyrocketing because of outpatient treatment of obesity related diseases.
    2. A typical person in NY state drinks 46 gallons of sugary drinks annually which contain a total of forty pounds of sugar.  Sixty percent of adults and twenty-five percent of children in NY state are obese or overweight.
    3. Starting next September, NY State might levy a tax on sugary drinks.
    4. Pondering national health legislation and perhaps universal coverage, six Congressmen were pictured eating chippers, aka “North Dakota Diet Food” (chocolate-covered potato chips).

    All of this takes me to a dilemma.  If government pays for our health care, should it have the right to tell us what to eat? 

    The Economic Life
    Whenever a nation answers the three basic economic questions–what to produce, how to produce, and who gets income–it is deciding the role for government.  We could imagine a continuum with the free market at one end and a command economy on the other side.  Adding government programs pushes that country closer to the command/government end.  Many economies have a mixture of a free market and government.

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    Notes From Warren Buffett

    Feb 28 • Thinking Economically • 718 Views

    Released yesterday, Warren Buffett’s annual letter to shareholders, as always, included sections that make me smile: 

    Talking about how he uses a consistent standard to assess Berkshire Hathaway’s performance:
    “That keeps us from the temptation of seeing where the arrow of performance lands and then painting the bull’s eye around it.”

    As an introduction to “What We Don’t Do”:
    “Long ago, Charlie laid out his strongest ambition: ‘All I want to know is where I’m going to die, so I’ll never go there.’”

    Discussing ownership of Geico:
    “An old Wall Street joke gets close to our experience:
    Customer: Thanks for putting me in XYZ stock at 5.  I hear it’s up to 18.
    Broker: Yes, and that’s just the beginning.  In fact, the company is doing so well now, that it’s an even better buy at 18 than it was when you made your purchase.
    Customer: Damn, I knew I should have waited.”

    Commenting on incorrect advice he gave to Geico management about issuing a credit card:
    “I subtly indicated that I was older and wiser.
    I was just older.”

    On seeing a silver lining in the housing bubble cloud:
    “Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means because the bubble burst.”

    After stating his own responsibility for risk control at Berkshire:
    “In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment.  And if he fails at it-with the government thereupon required to step in with funds or guarantees-the financial consequences for him and his board should be severe.”

    And finally, an inspiring conclusion:
    “At 86 and 79, Charlie and I remain lucky beyond our dreams.  We were born in America; had terrific parents who saw that we got good educations;  have enjoyed wonderful families and great health; and came equipped with a ‘business’ gene that allows us to prosper in a manner hugely disproportionate to that experienced by many people who contribute as much or more to our society’s well-being.  Moreover, we have long had jobs that we love, in which we are helped in countless ways by talented and cheerful associates.  Indeed, over the years, our work has become ever more fascinating; no wonder we tap-dance to work.”

    May we all tap dance to work!

     

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    Big and Little Worries

    Feb 27 • Thinking Economically • 234 Views

    1.  Sovereign debt: Contemplating big worries, I could place sovereign debt at the top of the the list. Should we currently be concerned about Greece, Spain and other EU nations with excessive obligations?  Beyond, should we be focusing on the U.K. and the U.S.? Referring to the U.S. stimulus, one article quotes Lois Lane saying, in flight, to Superman, “If you’ve got me, who’s got you?”
    2.  State and local debt: Within the United States, are state and local obligations unmanageable or, will the pressure to cut costs be therapeutic?
    3.  Exit strategy: Should the Fed’s exit strategy make you lose sleep?  Is there a productive way for the Fed to diminish the portfolio it gathered when it was flooding financial intermediaries with cash through quantitative easing?
    4.  Inflation: Perhaps, instead, inflation looms large as the next big worry.  Having deployed a massive stimulus, will inflation hit us on the rebound?
    5.  Housing:  Housing also might make us pause.  When the Fed stops buying mortgage backed securities, will potential liquidity for new construction evaporate?
    6.  Iran: Or, should we just think about Iran and the possibility that oil prices will soar if there is an attack on their nuclear facilities.
    7.  China: Maybe though, China is the big worry. Will they continue purchasing our debt?
    And finally, a small worry…
    Will I ever again buy tomato sauce??

    The Economic Life
    While people repeatedly say, “This time is different,” it never is.  The market system will always be subject to business cycles.  With GDP relatively high, it will hit a peak.  Next a contraction will unfold, then a trough, and finally the new expansion.  From Adam Smith onward, these cycles have recurred.  Returning to our worry list, I suggest optimism. 

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    Default D

    Feb 26 • Thinking Economically • 201 Views

    Seeing current concerns about the money owed by Greece, I wondered about her past record.  Until 1932, it was not good.  The first report of Greece defaulting on her debt was during the fourth century B.C.  At the time, ten Greek municipalities defaulted on their debt to the Delos Temple. More recently,  Greece defaulted five times: 1826, 1843, 1860, 1893, 1932. 

    Even worse, Spain holds a “default record” with seven nineteenth century defaults after having six defaults during previous centuries.

    These default records led me to wonder why investors still buy these securities. I found the answer by looking at the actual and potential returns which sometimes are more lucrative than more secure securities.

    The Economic Life

    Alexander Hamilton surely knew about sovereign debt defaults and wanted to avoid them. Reading about his plan to fund and refinance the United States’ revolutionary war debt reveals his commitment to establishing our good credit.  His approach was varied, including issuing new bonds to pay for those outstanding and servicing the interest promptly on the foreign debt.  It worked.  Even those in Holland, then the financial capital of the world, displayed confidence in our public credit. Adhering to the Hamiltonian philosophy, the United States has never defaulted on its debt. 

    Sovereign debt: government debt;  money owed (or guaranteed) by a country to investors who purchase its bonds.

     

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