Government Malpractice Breeds Health Care Havoc

02 Sunday Nov 2025

Posted by Nuetzel in Health Care, Subsidies

Tags

000 Mules, 340B Program, Affordable Care Act, Community Pricing, Continuing Resolution, Cross Subsidies, Federal Medical Assistance Percentages, Gender-Affirming Care, Government Shutdown, Guaranteed Renewability, Health Status Insurance, Jane Menton, John Cochrane, Medicaid, Medicare, Michael Cannon, Nationalized Health Care, Obamacare, Obamacare Expanded Subsidies, Obamacare Tax Credits, One Big Beautiful Bill Act, Peter G. Peterson Foundation, Portability, Pre-Existing Conditions, Right To Health Care, Tax Cuts and Jobs Act, Third-Party Payers

The impasse at the heart of the seemingly unending government shutdown revolves around health care subsidies.

First, there is disagreement about whether to extend the expanded Obamacare subsidies promulgated during the COVID pandemic. That expansion allowed individuals earning more than four times the federal poverty level (the original limit under the Affordable Care Act (ACA)) to receive tax credits for the purchase of health coverage on the exchange “marketplace”. Republicans find this highly objectionable. Many of them also object that the subsidies help pay for “essential health benefits” under the ACA that include so-called gender-affirming care.

Democrats and the insurance lobby would very much like to reinstate or retain the tax credits. The ten-year cost of extending them is more than $400 billion. Incredibly, it turns out that roughly 40% of individuals taking those tax credits did not file a medical claim in 2024. It was pure cash for insurers at the expense of taxpayers.

Second, the One Big Beautiful Bill Act (OBBB), among other things, restricts access to Medicaid by imposing work or job search requirements for overall eligibility. It also formally denies coverage to illegal aliens. This, of course, is opposed by Democrats, who insist that those requirements be rescinded.

Health Care Central Planning

These issues are part of a much larger debate over government dominance of the health care system. Almost every institutional arrangement in health care coverage and delivery is dictated by rules and practices imposed by government, and it would seem they are intentionally designed to escalate costs and compromise the delivery of care. The chart at the top of this post illustrates, in a high-level way, the futility of these efforts.

Medicare and Medicaid dominate government health care spending, as this report from the Peter G. Peterson Foundation shows. However, that strict budgetary view greatly understates the control government now exerts on the health care sector.

Medical Free Market Myth

Michael Cannon recently emphasized the irony of the persistent myth of a U.S. free market in health care:

“… government controls a larger share of health spending in the United States than in 27 out of 38 OECD-member nations, including the United Kingdom (83%) and Canada (73%), each of which has an explicitly socialized health-care system. When it comes to government control of health spending, the United States is closer to communist Cuba (89%) than the average OECD nation (75%).

“Nor does the United States have market prices for health care. Direct government price-setting, price floors, and price ceilings determine prices for more than half of U.S. health spending, including virtually all health-insurance premiums.“

ObamaSnare

Government “control” takes a variety of forms, including regulatory intrusions under the aegis of Obamacare. The Affordable Care Act (ACA), as its name implies, was sold as a way to keep health care and health insurance costs affordable. And it was billed as a way to extend individual health care coverage to the previously uninsured population. It failed badly on the first count and met with only limited success on the second.

One leg upon which the ACA stood was kicked away in 2017: the penalty for violating the Act’s individual mandate for health coverage was eliminated by the Tax Cuts and Jobs Act (TCJA). The penalty was arguably unconstitutional as a tax on non-commerce, or the non-purchase of insurance on the exchange. However, the Supreme Court had ruled narrowly in favor of the penalty in 2012, claiming that it was within the scope of Congress’ taxing power. Following passage of the TCJA, however, the toothlessness of the mandate caused the risk pool to deteriorate. This was aggravated by the ACA’s insistence on comprehensive coverage, which applies not just to policies sold on the Obamacare exchange, but to almost all private health insurance sold in the U.S.

A well-functioning marketplace would instead have promoted the availability of more moderately-priced coverage options. Ultimately, subsidies were all that prevented a broad exit from the marketplace. But they did nothing to slow the escalation in coverage costs and deteriorating quality of coverage and care:

“The result has been a race to the bottom in terms of the quality of insurance coverage for the sick. …individual-market provider networks [have] narrow[ed] significantly… They have eroded coverage through ‘poor coverage for the medications demanded by [the sick]’ … higher deductibles and copayments; mandatory drug substitutions and coverage exclusions for certain drugs; more frequent and tighter preauthorization requirements; highly variable coinsurance requirements; inaccurate provider directories; and exclusions of top specialists, high-quality hospitals, and leading cancer centers from their networks. ….

“The healthy suffer, too. … ‘currently healthy consumers cannot be adequately insured against the negative shock of transitioning to one of the poorly covered chronic disease states.’ A coalition of dozens of patient groups has complained that this dynamic ‘completely undermines the goal of the [Affordable Care Act].’”

Price Distortions

Cannon emphasizes another persistent myth: that government sets prices at levels that would prevail in a free market. Here is one baffling aspect of the many prices set by government for individual services under the Medicare and Medicaid programs.

“One of the more striking indications of widespread mispricing is that Medicare routinely sets different prices for identical items depending solely on who owns the facility.“

For example, ambulatory surgical centers are compensated much less for the same services as hospitals. The same is true of compensation for skilled nursing facilities vs. long-term care hospitals, and there appears to be no economic rationale for the differences. Furthermore, it’s an open secret that Medicare sets higher prices for lower-cost providers (and treatment of lower-cost patients). As Cannon notes, this explains the rapid growth of specialty hospitals owned by physicians.

Cannon provides much more detail on Medicare and Medicaid mis-pricing, including the blunting of patients’ price-sensitivity and the shifting of costs to private payers.

Divorcing Risk and Insurance

The price of insurance and insurer reimbursements are also prescribed by government. Cannon’s discussion includes the ACA’s abolition of risk-based insurance pricing, which is an astonishing case of economic malpractice. Depending on one’s health status, “community pricing” acts as either a price ceiling or a price floor. This creates perverse incentives for both the healthy and the unhealthy. Premiums fall short of the cost of caring for the sick.

The federal government attempts to compensate by subsidizing insurers based on the health status of individuals in their risk pool, but that falls short in terms of the quality of coverage for unhealthy individuals. Thus, both the healthy and taxpayers must shoulder an ever-increasing cost burden of insuring the unhealthy.

Circular Scam

As for Medicaid, certain arrangements drive up the cost of the program to taxpayers. For example, last March I wrote about this apparent scam allowing state governments to inflate their Medicaid costs, qualifying for hundreds of billions of federal matching funds:

“Here’s the gist of it: increases in state Medicaid reimbursements qualify for a federal match at a rate known as the Federal Medical Assistance Percentage (FMAPs). First, increases in Medicaid reimbursements must be funded at the state level. To do this, states tax Medicaid providers, but then the revenue is kicked back to providers in higher reimbursements. The deluge of matching federal dollars follows, and states are free to use those dollars in their general budgets.“

Unfortunately, FMAP reform is not directly addressed in the “clean” Continuing Resolution before Congress, though reduced funding levels might lead to reductions in FMAP percentages.

And Another Circular Scam

John Cochrane is largely in agreement with Cannon’s piece, but he focuses first on cross subsidies flowing to “eligible” hospitals dispensing prescription drugs to low-income patients. These hospitals get the drugs from pharmaceutical companies at a steep discount mandated by the so-called 340B program, but the hospitals then bill insurers (or Medicare and Medicaid), a significant markup over their acquisition cost. The Medicaid expansion under the ACA led to an increase in the number of hospitals eligible for the drug discounts.

But that’s not the end of the story. This arrangement creates an obvious incentive for the drug companies to raise their pre-discounted prices. Another unintended outcome cited by Cochrane is that eligible hospitals do not use the proceeds of their mark-ups to offer better care (or care at a lower cost) to low-income consumers. Instead, the funds tend to be directed to investment accounts. The program also creates another incentive for hospital consolidation.

Someone Else’s Money

Unfortunately, the dysfunction in health care goes deeper than Obamacare, Medicare, and Medicaid. The third-party payment system itself has been at the root of cost escalation. It largely relieves consumers of their sovereignty over purchasing decisions, rendering them much less sensitive to variations in price. This can be seen clearly in one of Cannon’s charts, reproduced below:

In addition, the disparate income tax treatment of employer-provided health coverage exacerbates cost escalation. Obviously, employees receiving this deduction can afford higher-quality and more comprehensive coverage. This exemption has acted to drive up the cost of all health care and insurance coverage over the almost nine decades of its existence..

What To Do?

The claim that the U.S. health care system operates within a free market ecosystem is obviously absurd. Together, the Cochrane and Cannon pieces represent something of a gripe session, but it is well deserved. Both authors devote sections to reforms, however. They don’t break new ground in the debate, but the overarching theme of the suggested reforms is to give consumers authority over their health care spending. That means keeping government out of health care in all the myriad ways it now intrudes. It also means that insurers should not have authority to dictate how health care is priced. The key is to allow competition to flourish among health care providers and insurers.

Ending FMAPs and the tax exemption for employer-provided coverage is one thing, but it’s another to contemplate dismantling Medicare, Medicaid, and the many rules and pricing arrangements enforced under Obamacare.

Cochrane takes an accommodating approach to the health care needs of seniors and those in need of a safety net. He calls for Medicare and Medicaid to be replaced with the issuance of vouchers (rather than cash) toward the purchase of affordable private health care plans. Then, health coverage can be provided in a lightly regulated, competitive market without all the distortions and sneaky opportunities for graft embedded in our current entitlements.

Conflicting Rights and Reality

And what of the argument that health care is a human right? That notion is, of course, very popular on the left. The idea subtly shifts a meaningful portion of the responsibility for one’s health onto others, including providers and taxpayers. But smokers, heavy drinkers, reckless drivers, hard drug users, and the avoidably obese should not be led to expect a free ride for risky behaviors.

Of course, it’s not a basic human right to demand, by force of government, involuntary service of health care workers, or that taxpayers give alms, but Cochrane answers with this:

“Yes! It is a basic human right that I should be free to offer my money to a willing physician or hospital, in a brutally competitive and innovative market.”

“Willing” is a key word, and to that we should add “able”, but those are qualifying conditions that markets help facilitate.

Jane Menton has discussed the notion of a human right to health care, wisely explaining that conditions are not always compatible with fulfilling such a right. Her primary concern is the future supply of medical personnel, and an acute shortage of nurses.

“In our current political environment, young people seem to think that claiming something as an entitlement means someone will inevitably show up to do the work.“

To codify a right to health care would be an ill-fared call for a nationalized solution. It would be a prescription for still higher costs and lower quality care. As in any other sector, centralized decision-making leads to misallocated resources, higher costs, and inferior outcomes for patients. Our current mess gives a strong hint of the kind of over-regulated dysfunction that nationalization would bring.

Insurance On Insurability

Pre-existing conditions motivate much of the discussion surrounding a presumed right to health care. Individual portability of group health coverage goes partway in addressing coverage for pre-existing conditions. Portability is mandated by the Health Insurance Portability and Accountability Act of 1996, but like community rating, it shifts costs to others. That is, the cost of covering pre-existing conditions becomes the responsibility of employers in general, group insurers, and ultimately healthy (and younger) workers.

Given time, the debate over a right to health care can be rendered moot via market processes. Cochrane has long supported the concept of health status insurance. Such policies would allow healthy consumers to guarantee their insurability against the risk of future health contingencies. Guaranteed renewability is a limited form of this type of coverage. General availability of health status insurance contracts, offered regardless of current coverage, could allow for a range of future insurability options at affordable prices. Then, pre-existing conditions would cease to be such a huge driver of cross subsidies.

DOGE Hunts On, Despite Obstacles

30 Saturday Aug 2025

Posted by Nuetzel in Administrative State, DOGE, Liberty

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Administrative State, AI Deregulation Decision Tool, Big Beautiful Bill, Dan Mitchell, Deferred Resignation, Deficit Reduction, DOGE, Elon Musk, Embedded Employees, Entitlement Reform, HHS, Medicaid, Medicare, Michael Reitz, Rescission Bill, RIF Rules, Senate DOGE Caucus, Senator Joni Ernst, Social Security, USAID, Veronique de Rugy, Veterans Administration

I’ve noted a number of policy moves by Donald Trump that I find aggravating (scroll my home page), but I still applaud his administration’s agenda to downsize government, promote operational efficiency, and deregulate the private economy. It’s just too bad that Trump demonstrates a penchant for expanding government authority in significant ways, which makes it harder to celebrate successes of the former variety. Beyond that, there have been huge obstacles to rationalizing the administrative state. We’ve seen progress in some areas, but the budgetary impact has been disappointing.

Grinding On

The Department of Government Efficiency (DOGE) was to play a large role in the effort to reduce fraud and inefficiency at the federal level. On the surface, it’s easy to surmise that DOGE has failed in its mission to root out government waste. After seven months, DOGE touts that it has saved taxpayers $205 billion thus far. That is well short of the original $2 trillion objective (subsequently talked down by Elon Musk), but it was expected to take 18 months to reach that goal. Still, the momentum has slowed considerably.

Moreover, the $205 billion figure does not represent recurring budgetary savings. Some of it is one-time proceeds from property sales or grant cancellations. Some of it ($30 billion) seems to represent savings in regulatory compliance costs to Americans, but that’s not clear as the DOGE website is lightly documented, to put it charitably. A recent analysis reached the conclusion that DOGE had exaggerated the savings it has claimed for taxpayers, which seems plausible.

But DOGE is still plugging away, reviewing federal contracts, programs, regulations, payments, grants, workforce deployment, and accounting systems. The work is desperately needed given the fraud that’s been exposed among the agency workforce, which seemed to escalate following the advent of massive Covid benefit payments during the pandemic. Some details of an investigation by the Senate DOGE Caucus, discussed at this link, are truly astonishing. Employees at multiple state and federal agencies have been collecting food stamps, survivor benefits, and even unemployment benefits while employed by government. Apparently, this was made possible by the lack of list de-duplication by the federal agencies that dole out these benefits. This might be a pretty good explanation for the lawsuits filed by federal employee unions attempting to prevent DOGE from accessing agency records. Congratulations to Senator Joni Ernst, Chairman of the Caucus, for her leadership in exposing this graft.

False Aspersions

Shortly after DOGE was constituted, most of its employees were assigned to individual agencies to identify opportunities to reduce waste and promote efficiency. This has led to confusion about the extent to which DOGE should take credit for certain savings maneuvers. However, contrary to some allegations, no DOGE employees have been “embedded” as career civil servants.

Since almost the start of Trump’s second term, DOGE has been blamed for workforce reductions that some deemed reckless and arbitrary. There were indeed some early mistakes, most notably at HHS, but a number of those key workers were rehired. Many of the force reductions were instigated by individual agencies themselves, and many of those were voluntary separations with generous severance packages.

As to the “arbitrary” nature of the force reductions, one former DOGE staffer described the difficulty of making sensible cuts at the Veterans Administration under agency rules:

“Then came a reality check about RIF rules, which turned out to be brutally deterministic:

Tenure matters most—new hires were cut first
Veterans’ preference comes next; vets are protected over non-vets
Length of service trumps performance—seniority beats skill
Performance ratings break any remaining ties

“These reduction-in-force rules–which stem from the Veterans’ Preference Act of 1944–surprised me and many others. Unlike private industry layoffs that target middle management bloat and low performers, the government cuts its newest people first, regardless of performance. Anyone promoted within the last two years was also considered probationary—first in line to go.“

It would be hard to be less arbitrary than these rules. Other agencies are subject to similar strictures on reductions in force. No wonder the Administration relied heavily on a buyout offer (“deferred resignation”) with broad eligibility in its attempt to downsize government. Furthermore, the elimination of positions was largely targeted functions that were wasteful of taxpayer resources, such as promoting DEI objectives and administering grants to NGOs driven by ideological motives.

Of course, the buyouts come with a cost to taxpayers. In fact, one report asserted that DOGE’s efforts themselves cost taxpayers $135 billion or more. Of course, buyouts carry a one-time cost. However, that figure also includes a questionable estimate of lost productivity caused by turmoil at federal agencies. I’m just a little skeptical when it comes to claims about the productivity of the federal workforce.

Obstacles

DOGE has had to grapple with other severe limitations, as Dan Mitchell has commented. These are primarily rooted in the spending authority of Congress. Only one rescission bill reflecting DOGE cuts, totaling just $9 billion, has made it to Trump’s desk. Another “untouchable” for DOGE is interest on the federal debt, which has become a huge portion of the federal budget.

Furthermore, DOGE is guilty of one self-imposed obstacle: the main driver of ongoing deficits is entitlement spending, While the Big Beautiful Bill included Medicaid reforms, the Trump Administration and Congress have shown little interest in shoring up Social Security and Medicare, both of which are technically insolvent. While DOGE would seem to have limited authority over entitlements, as opposed to the discretionary budget, some charge that DOGE made a critical error in failing to address entitlement fraud. According to Veronique de Rugy:

“It is insane not to have started there. Given DOGE’s comparative advantage in data analytics and [information technology], this is where it can have the greatest impact… Cracking down on this waste isn’t just about saving money; it’s about restoring integrity to safety-net programs and protecting taxpayers. And if fixing this problem is not quintessential ‘efficiency,’ what is?“

On the Bright Side

Michael Reitz offered a different perspective. He cited the difficulty of reforming an entrenched bureaucracy. He also noted the following, however, as a kind of hidden success of DOGE and Elon Musk:

“But others I spoke with thought Musk’s four months in government were both substantive and symbolic. He changed the conversation about waste and grift. Musk made cuts cool again, especially for Republican politicians who have forgotten fiscal restraint. He highlighted the need to follow the data and oppose bureaucrats who impede reform by controlling the flow of information.“

Of course, DOGE has been instrumental in identifying absurdly wasteful federal contracts, even if they are “small change” relative to the size of the federal budget. This includes grants to NGOs that appear to have functioned primarily as partisan slush funds. DOGE has also helped identify deregulatory actions to eliminate duplicative or contradictory agency rules on industry, reducing costly economic burdens on the private sector. The DOGE website claims (preliminarily) that it has deleted 1.9 million words of regulation, but doesn’t provide a total number of rules eliminated.

An important part of DOGE’s mission was to modernize technology, software, and accounting systems at federal agencies. This included centralization of these systems with improved tracking of payments and a written justification for each payment. These efforts were met with hostility from some quarters, including lawsuits to limit or prevent DOGE personnel from accessing agency data. Nevertheless, DOGE has pushed ahead with the initiative. This is a laudable attempt to not only modernize systems, but to encourage transparency, accountability, and efficiency.

In a related development, this week DOGE was blamed by a whistleblower for uploading a file from Social Security containing sensitive information to an unsecured cloud environment. However, a spokesperson for the Social Security Administration stated that the data was secure and that the SSA had no indication that it had been breached. We shall see.

AI Scrutiny

Now, DOGE is recommending the use of an AI tool to cut federal regulations. According to Newsweek:

“The ‘DOGE AI Deregulation Decision Tool,’ developed by engineers brought into government under Elon Musk’s DOGE initiative, is programmed to scan about 200,000 existing federal rules and flag those that are either outdated or not legally required.“

Critics are concerned about accuracy and legal complexities, but the regulations flagged by the AI tool will be reviewed by attorneys and other agency personnel, and there will be an opportunity for public comment. The process could make deregulatory progress well beyond what would be possible under purely human review. DOGE believes that up to 100,000 rules could be eliminated, saving trillions of dollars in compliance costs. If successful, this might well turn out to be DOGE’s signal accomplishment.

Conclusion

I’m disappointed at the flagging momentum of DOGE’s quest to eliminate inefficiencies in the executive branch. I’m also frustrated by the limited progress in translating DOGE’s work into ongoing deficit reduction. In addition, it was a mistake to leave aside any scrutiny of improper entitlement payments. Nevertheless, DOGE has has some significant wins and the effort continues. Also, it must be acknowledged that DOGE has faced tremendous obstacles. For too long, government itself has metastasized along with bureaucratic inefficiencies and graft. That is the rotten fruit of the symbiosis between rent seeking behavior and a bloated public sector. We should applaud the spirit motivating DOGE and encourage greater progress.

Choosing DOGE Over a Prodigal State Apparatus

03 Thursday Apr 2025

Posted by Nuetzel in Big Government, DOGE

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Al Gore, Barack Obama, Bernie Sanders, Bill Clinton, Border Security, Chuck Schumer, DEI, Department of Education, Department of Government Efficiency, Department of Interior, Discretionary Budget, DOGE, Donald Trump, Elon Musk, entitlements, FDA, Force Reductions, Fourth Branch, Fraud, Graft, HHS, Indirect Costs, Jimmy Carter, Joe Biden, Mandatory Budget, Medicaid, Medicare, Nancy Pelosi, NIH Grants, Obamacare, Provisional Employees, Public debt, Severance Packages, Social Security, U.S. Digital Service, U.S. Postal Service, USAID, Voluntary Separations, Waste

I prefer a government that is limited in size and scope, sticking closely to the provision of public goods without interfering in private markets. Therefore, I’m delighted with the mission of the Department of Government Efficiency (DOGE), a rebranded version of the U.S. Digital Service created by Barack Obama in 2014 to clean up technical issues then plaguing the Obamacare web site. The “new” DOGE is fanning out across federal agencies to upgrade systems and eliminate waste and fraud.

A Strawman

For years, democrats such as Barack Obama and Joe Biden have advocated for eliminating waste in government. So did Bill Clinton, Al Gore, Bernie Sanders, Chuck Schumer, and Nancy Pelosi. Here’s Mark Cuban on the same point. Were these exhortations made in earnest? Or were they just lip service? Now that a real effort is underway to get it done, we’re told that only fascists would do such a thing.

I’m seeing scary posts about DOGE even on LinkedIn, such as the plight of Americans unable to get federal public health communications due to layoffs at HHS, while failing to mention the thousands of new HHS employees hired by Biden in recent years. As if HHS was particularly effective in dispensing good public health advice during the pandemic!

Those kinds of assertions are hard to take seriously. For reasons like these and still others, I tend to dismiss nearly all of the horror stories I hear about DOGE’s activities as nitwitted virtue signals or propaganda.

Many on the left claim that DOGE’s work is careless, and especially the force reductions they’ve spearheaded. For example, they claim that DOGE has failed to identify key employees critical to the functioning of the bureaucracy. The tone of this argument is that “this would not pass muster at a well-managed business”. A “sober” effort to achieve efficiencies within the federal bureaucracy, the argument goes, would involve much more consideration. In other words, given political realities, it would not get done, and they really don’t want it to get done.

The best rationale for the ostensible position of these critics might be situations like the dismissal of several thousand provisional employees at the FDA, a few of whom were later rehired to help manage the work load of reviewing and approving drugs. However, thus far, only a tiny percentage of the federal force reductions under consideration have involved immediate layoffs.

Of course, DOGE is not being tasked to review the practices of a well-managed business or a well-managed governmental organization. What we have here is a dysfunctional government. It is a bloated, low productivity Leviathan run by management and staff who, all too frequently, seem oblivious to the predicament. Large force reductions at all levels are probably necessary to make headway against entrenched interests that have operated as a fourth branch of government.

Thus, I see the leftist critique of Trump’s force reductions as something of a strawman, and it falls flat for several other reasons. First, the vast bulk of the prospective reduction in headcount will be voluntary, as the separating employees have been offered attractive severance packages. Second, force reductions in the private sector always feel chaotic, and they often are. And they are sometimes executed without regard to the qualifications of specific employees. Tough luck!

Duplicative functions, poor data systems, and a lack of control have led to massive misappropriations of funds. The dysfunction has been enabled by a metastasization of nests of administrative authority inside agencies with “incomprehensible” org charts, often having multiple departments with identical functions that do not communicate. These departments frequently use redundant but unconnected systems. A related problem is the inadequacy of documentation for outgoing payments. Needless to say, this is a hostile environment for effective spending controls.

It’s worth emphasizing, by the way, DOGE’s “open book” transparency. It’s not as if Elon Musk and DOGE are attempting to sabotage the deep state in the dark of night. Indeed, they are shouting from the rooftops!

Doing It Fast

Every day we have a new revelation from DOGE of incredible waste in the federal bureaucracy. Check out this story about a VA contact for web site maintenance. All too ironically, what we call government waste tends to have powerful, self-interested, and deeply corrupt constituencies. This makes speed an imperative for DOGE. In a highly politicized and litigious environment, the extent to which the Leviathan can be brought to heel is partly a function of how quickly the deconstruction takes place. One must pardon a few temporary dislocations that otherwise might be avoided in a world free of rent seeking behavior. Otherwise, the graft (no, NOT “grift”) will continue unabated.

The foregoing offers sufficient rationale not only for speedy force reductions, but also for system upgrades, dissolution of certain offices, and consolidation of core functions under single-agency umbrellas.

The Bloody Budget

It’s difficult to know when budget legislation will begin to reflect DOGE’s successes. The actual budget deficit might be affected in fiscal year 2025, but so far the savings touted by DOGE are chump change compared to the expected $2 trillion deficit, and only a fraction of those savings contribute to ongoing deficit reduction.

Uncontrolled spending is the root cause of the deficit, as opposed to insufficient tax revenue, as evidenced by a relatively stable ratio of taxes to GDP. The spending problem was exacerbated by the pandemic, but Congress and the Biden Administration never managed to scale outlays back to their previous trend once the economy recovered. Balancing the budget is made impossible when the prevailing psychology among legislators and the media is that reductions in the growth of spending represent spending cuts.

Federal spending is excessive on both the discretionary and mandatory sides of the budget. Ultimately, eliminating the budget deficit without allowing the 2017 Trump tax cuts to expire will require reform to mandatory entitlements like Social Security, Medicare, and Medicaid, as well as reductions across an array of discretionary programs.

DOGE’s focus on fraud and waste extends to entitlements. At a minimum, the data and tracking systems in place at HHS and SSA are antiquated, sometimes inaccurate, and are highly susceptible to manipulation and fraud. Systems upgrades are likely to pay for themselves many times over.

But all indications are that it’s much worse than that. Social security numbers were issued to millions of illegal immigrants during the Biden Administration, and those enrollees were cleared for maximum benefits. There were a significant number of illegals enrolled in Medicaid and registered to vote. While some of these immigrants might be employed and contributing to the entitlement system, they should not be employed without legal status. Of course, one can defend these entitlement benefits on purely compassionate grounds, but the availability of benefits has served to attract a massive flow of illegal border crossings. This illustrates both the extent to which the entitlement system has been compromised as well as the breakdown of border security.

On the discretionary side of the budget, DOGE has identified an impressive array programs that were not just wasteful, but by turns ridiculous or politically motivated (for example, the bulk of USAID’s budget). Many of these funding initiatives belong on the chopping block, and components that might be worthwhile have been moved to agencies with related missions. In addition, authorized but unspent allocations have been identified that seem to have been held in reserve, and which now can be used to reduce the public debt.

Research Grants?

Of course, like the initial scale of the FDA layoffs, a few mistakes have and will be made by DOGE and agencies under DOGE’s guidance. Many believe another powerful argument against DOGE is the Trump Administration’s 15% limit on indirect costs as an add-on to NIH grants. Critics assert that this limit will hamstring U.S. scientific advancement. However, it won’t “kill” publicly funded research. As this article in Reason points out, historically public funding has not been critical to scientific advancement in the U.S. In fact, private funding accounts for the vast bulk of U.S. R&D, according to the Congressional Research Service. Moreover, it’s broadly acknowledged that indirect costs are subject to distortion, and that generous funding of those costs creates bad incentives and raises thorny questions about cross-subsidies across funders (15% is the rate at which charities typically fund indirect costs).

No doubt some elite research universities will suffer declines in grants, but their case is weakened politically by a combination of lax control over anti-Semitic protests on campus, the growing unpopularity of DEI initiatives in education, and public awareness of the huge endowments over which these universities preside. Nevertheless, I won’t be surprised to see the 15% limit on indirect research costs revised upward somewhat.

More DOGE Please

I’ve criticized the numbers posted on DOGE’s website elsewhere. They could do a much better job of categorizing and reporting the savings they’ve achieved, and they have far to go before meeting the goals stated by Elon Musk. Be that as it may, DOGE is making progress. Here is a report on a few of the latest cuts.

As I’ve emphasized on numerous occasions, the federal government is a strangling mass of tentacles, squeezing excessive resources out of the private sector and suffocating producers with an endless catalogue of burdensome rules. There are many examples of systemic waste taking place within the federal bureaucracy. For example, since its creation by Jimmy Carter, the Department of Education has managed to piss away trillions of dollars while student performance has declined. The Small Business Administration has doled out millions of dollars in subsidized loans to super-centenarians as well as children. The U.S. Postal Service keeps losing money and mail while deliveries slow to a crawl. Big projects become mired in endless iterations of reviews and revisions, such as Obama’s infrastructure plan and Joe Biden’s infrastructure and rural broadband initiative.

And again, regulatory agencies are often our worst enemies, imposing burdensome requirements with which only the largest industry players can afford to comply. Indeed, the savings achieved through the DOGE process might pale in comparison to the resources that could be liberated by rationalizing the tangle of regulations now choking private business.

A significant narrowing of the budget deficit would be a major accomplishment for DOGE. Even one-time savings to help pay down the public debt are worthwhile. In this latter regard, I hope DOGE’s work with the Department of Interior helps facilitate the sale of dormant federal assets. This includes land (not parks) and buildings worth literally trillions of dollars, and sometimes costing billions annually to maintain.

A Social Security “Private Option” and Federal Debt

03 Tuesday Dec 2024

Posted by Nuetzel in Privatization, Social Security

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Donald Trump, FDIC, Federal Debt, FICA, Fiscal Theory of Price Level, Government Budget Constraint, Insolvency, John Cochrane, Medicare, Penn-Wharton Budget Model, Ponzi Scheme, Primary Surplus, Private Option, Privatization, Social Security, Trust Funds, Unbanked Households

Social Security wasn’t designed as a true saving vehicle for workers. Instead, SS has always been a pay-as-you-go system under which current benefits are funded by the payroll taxes levied on the current employed population. In fact, many Americans earn lousy effective returns on their tax “contributions” (also see here), though low-income individuals do much better than those near or above the median income. Worst of all, under pay-as-you-go, the system can collapse like a Ponzi scheme when the number of workers shrinks drastically relative to the retired population, leading to the kind of situation we face today.

Unfunded Obligations

Payroll tax revenue is no longer adequate to pay for current Social Security and Medicare benefits, and the problem is huge: according to the Penn-Wharton Budget Model, the unfunded obligations of Social Security (including old age, survivorship and disability) through 2095 have a present value of $18.1 trillion in constant 2024 dollars (using a discount rate of 4.4%). The comparable figure for Medicare Part A is $18.6 trillion. Together these amount to more than the current national debt.

Barring earlier reform, the Social Security Trust Fund is expected to be exhausted in 2033 (excluding the disability fund). At that point, a 20% reduction in benefits will be required by law. (More on the trust fund below.)

What To Do?

The most prominent reform proposals involve reduced benefits for wealthy beneficiaries, increased payroll taxes on high earners, and an increase in the retirement age. However, President-Elect Donald Trump shows no inclination to make any changes on his watch. This is unfortunate because the sooner the system’s insolvency is addressed, the less draconian the necessary reforms will be.

A neglected reform idea is for SS to be privatized. Many observers agree in principle that current workers could earn better returns over the long-term by investing funds in a conservative mix of equities and bonds. The transition to private accounts could be made voluntary, so that no one is forced to give up the benefits to which they’re “entitled”.

Takers would receive an initial deposit from the government in a tax-deferred account. For participating pre-retirees, ongoing FICA contributions (in whole or in part) would be deposited into their private accounts. They could purchase a private annuity with the balance at retirement if they choose. The income tax treatment of annuity payments or distributions could mimic the current tax treatment of SS benefits.

Given that the balance remaining at death would be heritable, some individuals might be willing to accept an initial deposit less than the actuarial PV of the future SS benefits they’ve accumulated to-date (discounted at an internal rate of return equating future benefits “earned” to-date and contributions to-date). I also believe many individuals would willingly accept a lower initial deposit because they would gain some control over investment direction. Such voluntarily-accepted reductions in initial deposits to personal accounts would mean the government’s issue of new debt would be smaller than the decrease in future benefit obligations.

Nevertheless, funding the accounts at the time of transition would necessitate a huge and immediate increase in federal debt. Market participants and political interests are likely to fear an impossible strain on the credit market. Perhaps the transition could be staged over time to make it less “shocking”, but that would complicate matters. In any case, heavy debt issuance is the rub that dissuades most observers from supporting privatization.

Fiscal Theory of Price Level

The fiscal theory of the price level (FTPL) implies that such a privatization might not be an insurmountable challenge after all, at least in terms of comparative dynamics. Much background on FTPL can be found at John Cochrane’s Grumpy Economist Substack.

FTPL asserts that fiscal policy can influence the price level due to a constraint on the market value of government debt. This market value must be in balance with the expected stream of future government primary surpluses. This is known as the government budget constraint.

The primary surplus excludes the government’s interest expense, a budget component that must be paid out of the primary surplus or else borrowed. Of course, the market value of government debt incorporates the discounted value of future interest payments.

This budget constraint must be true in an expectational sense. That is, the market must be convinced that future surpluses will be adequate to pay all future obligations associated with the debt. Otherwise, the value of the debt must change.

Should a spending initiative require the government to issue new debt with no credible offset in terms of future surpluses, the market value of the debt must decline. That means interest rates and/or the price level must rise. If interest rates are fixed by the monetary authority (the Fed) then only prices will rise.

A SS Private Option Under FTPL

But what about FTPL in the context of entitlement reform, specifically a privatization of Social Security? Suppose the government issues debt and then deposits the proceeds into personal accounts to fund future benefits. Future government surpluses (deficits) would increase (decrease) by the reduction in future SS benefit payments.

This improved budgetary position should be highly credible to financial markets, despite the fact that benefits are not and never have been guaranteed. If it is credible to markets, the new debt would not raise prices, nor would it be valued differently than existing debt. There need not be any change in interest rates.

But Thin Ice

There are risks, of course. It might be too much to hope that other federal spending can be restrained. That kind of failure would subvert the rationale for any budgetary reform. A variety of other crises and economic shocks are also possible. Those could disrupt markets and jeopardize budget discipline as well. Given a severe shock, interest expense could more readily explode given the massive debt issuance required by the reform discussed here. So there are big risks, but one might ask whether they could turn out to be more disastrous in the absence of reform.

Other Details

The private account “offers” extended to workers or beneficiaries relative to the actuarial PVs of their future benefits would be controversial. Different offer percentages (discounts) could be tested to guage uptake.

Another issue: provisions would have to be made for individuals in “unbanked” households, estimated by the FDIC to be about 4.2% of all U.S. households in 2023. Voluntary uptake of the “offer” is likely to be lower among the unbanked and among those having less confidence in their ability to make financial decisions. However, even a simplified set of choices might be superior to the returns under today’s SS, even for low-income workers, not to mention the very real threat of future reductions in benefits. Furthermore, financial institutions might compete for new accounts in part by offering some level of financial education for new clients.

A similar reform could be applied to Medicare, which like SS is also technically insolvent. Participating beneficiaries could receive some proportion of expected future benefits in a private account, which they could use to pay for private or public health insurance coverage or medical expenses. From a budget perspective, the increase in federal debt would be balanced against the reduction in future Medicare benefits, which would constitute a credible increase (decrease) in future surpluses (deficits).

Credibility

But again, how credible would markets find the decrease in benefit obligations? Direct reductions in future entitlements should be convincing, though politicians are likely to find plenty of other ways to use the savings.

On the other hand, markets already give some weight to the possibility of future benefit cuts (or other policies that would reduce SS shortfalls). So it’s likely that markets will give the reform’s favorable budget implications significant but only “incremental credit”.

Another possible complication is that the market, prior to execution of the reform, might discount the uptake by workers and current retirees. This would necessitate better offers to improve uptake and more debt issuance for a given reduction in future obligations. Skepticism along these lines might worsen implications for the price level and interest rates.

The Trust Fund

Finally, what about the SS Trust Fund? Can it play in role in the reform discussed above? The answer depends on how the trust fund fits into the federal government’s budgetary position.

The trust fund holds as assets only non-marketable Treasury securities acquired in the past when SS contributions exceeded benefit payments. The excess payroll tax revenue was placed in the trust fund, which in turn lent the funds to the federal government to help meet other budgetary needs. Hence the bond holdings.

In terms of the government’s fiscal position, the money has already been pissed away, as it were. The bonds in the trust fund do not represent a pot of money. As noted above, with our age demographics now reversed, payroll taxes no longer meet benefits. Thus, bonds in the trust fund must be redeemed to pay all SS obligations. The Treasury must pay off the bonds via general revenue or by borrowing additional amounts from the public.

Post-reform, if continuing deficits are the order of the day, redeeming bonds in the trust fund would do nothing to improve the government’s fiscal position. If the trust fund “cashes them in” to help meet benefit payments, the federal government must borrow to raise that cash. In other words, the bonds in the trust fund would be more or less superfluous.

But what if the federal budget swings into a surplus position post-reform? In that case, federal tax revenue would cover the redemption of at least some of the bonds held by the trust fund. SS beneficiaries would then have a meaningful claim on federal taxpayers through the trust fund and the government’s surplus position, which would reduce the new federal debt required by the reform.

Conclusion

The Social Security and Medicare systems are in desperate need reform, but there is little momentum for any such undertaking. Meanwhile, exhaustion of the SS and Medicare trust funds creeps ever closer, along with required benefit cuts. All of the reform options would be painful in one way or another. A voluntary privatization would require a huge makeover, but it might be the least painful option of all. Current workers and beneficiaries would not be compelled to make choices they found inferior. Moreover, the new debt necessary to pay for the reforms would be matched by a reduction in future government obligations. The fiscal theory of the price level implies that the reform would not be inflationary and need not depress the value of Treasury bonds, provided the reform is accompanied by long-term budget discipline.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Note: the chart at the top of this post was produced by the Congressional Budget Office and appears in this publication.

Promises and Policies: Grading the Candidates

29 Tuesday Oct 2024

Posted by Nuetzel in Election

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2024 Election, Abortion, Abraham Accords, Barack Obama, Capitalism, Climate Change, Corporatism, DEI, Dobbs, Donald Trump, Elon Musk, fascism, Federal Reserve, First Amendment, Fossil fuels, Housing, Hysteria, Immigration, Inflation, Israel, Joe Biden, Kamala Harris, Medicaid, Medicare, Obamacare, Renewable energy, Second Amendment, Social Security, Supreme Court, Tariffs, Tax Policy, Ukraine, Vladimir Putin

Wow! We’re less than a week from Election Day! I’d hoped to write a few more detailed posts about the platforms and policies of Kamala Harris and Donald Trump, but I was waylaid by Hurricane Milton. It sent us scrambling into prep mode, then we evacuated to the Florida Panhandle. The drive there and back took much longer than expected due to the mass exodus. On our return we found the house was fine, but there was significant damage to an exterior structure and a mess in the yard. We also had to “de-prep” the house, and we’ve been dealing with contractors ever since. It was an exhausting episode, but we feel like we were very lucky.

Now, with less than a week left till the election, I’ll limit myself to a summary of the positions of the candidates in a number of areas, mostly but not all directly related to policy. I assign “grades” in each area and calculate an equally-weighted “GPA” for each candidate. My summaries (and “grades”) are pretty off-the-cuff and not adequate treatments on their own. Some of these areas are more general than others, and I readily admit that a GPA taken from my grade assignments is subject to a bit of double counting. Oh well!

Role of Government: Kamala Harris is a statist through and through. No mystery there. Trump is more selective in his statist tendencies. He’ll often favor government action if it’s politically advantageous. However, in general I think he is amenable to a smaller role for the public than the private sector. Harris: F; Trump: C

Regulation: There is no question that Trump stands for badly needed federal regulatory reform. This spans a wide range of areas, and it extends to a light approach to crypto and AI regulation. Trump plans to appoint Elon Musk as his “Secretary of Cost Cutting”. Harris, on the other hand, seems to favor a continuation of the Biden Administration’s heavy regulatory oversight. This encourages a bloated federal bureaucracy, inflicts high compliance costs on the private sector, stifles innovation, and tends to concentrate industrial power. Harris: F; Trump: A

Border Policy: Trump wants to close the borders (complete the wall) and deport illegal immigrants. Both are easier said than done. Except for criminal elements, the latter will be especially controversial. I’d feel better about Trump’s position if it were accompanied by a commitment to expanded legal immigration. We need more legal immigrants, especially the highly skilled. For her part, Harris would offer mass amnesty to illegals. She’d continue an open border policy, though she claims to want certain limits on illegal border crossings going forward. She also claims to favor more funds for border control. However, it is not clear how well this would translate into thorough vetting of illegal entrants, drug interdiction at the border, or sex trafficking. Harris: D; Trump: B-

Antitrust: Accusations of price gouging by American businesses? Harris! Forty three corporations in the S&P 500 under investigation by the DOJ? The Biden-Harris Administration. This reflects an aggressively hostile and manipulative attitude toward the business community. Trump, meanwhile, might wheedle corporations to act on behalf of certain of his agendas, but he is unlikely to take such a broadly punitive approach. Harris: F; Trump: B-

Foreign Policy: Harris is likely to continue the Biden Administration’s conciliatory approach to dealing with America’s adversaries. The other side of that coin is an often tepid commitment to longtime allies like Israel. Trump believes that dealing from a position of strength is imperative, and he’s willing to challenge enemies with an array of economic and political sticks and carrots. He had success during his first term in office promoting peace in the Middle East. A renewed version of the Abraham Accords that strengthened economic ties across the region would do just that. Ideally, he would like to restore the strength of America’s military, about which Harris has less interest. Trump has also shown a willingness to challenge our NATO partners in order to get them to “pay their fair share” toward the alliance’s shared defense. My major qualification here has to do with the candidates’ positions with respect to supporting Ukraine in its war against Putin’s mad aggression. Harris seems more likely than Trump to continue America’s support for Ukraine. Harris: D+; Trump: B-

Trade: Nations who trade with one another tend to be more prosperous and at peace. Unfortunately, neither candidate has much recognition of these facts. Harris is willing to extend the tariffs enforced during the Biden Administration. Trump, however, is under the delusion that tariffs can solve almost anything that ails the country. Of course, tariffs are a destructive tax on American consumers and businesses. Part of this owes to the direct effects of the tax. Part owes to the pricing power tariffs grant to domestic producers. Tariffs harm incentives for efficiency and the competitiveness of American industry. Retaliatory action by foreign governments is a likely response, which magnifies the harm.

To be fair, Trump believes he can use tariffs as a negotiating tool in nearly all international matters, whether economic, political, or military. This might work to achieve some objectives, but at the cost of damaging relations more broadly and undermining the U.S. economy. Trump is an advocate for not just selective, punitive tariffs, but for broad application of tariffs. Someone needs to disabuse him of the notion that tariffs have great revenue-raising potential. They don’t. And Trump is seemingly unaware of another basic fact: the trade deficit is mirrored by foreign investment in the U.S. economy, which spurs domestic economic growth. Quashing imports via tariffs will also quash that source of growth. I’ll add one other qualification below in the section on taxes, but I’m not sure it has a meaningful chance.

Harris: C-; Trump: F

Inflation: This is a tough one to grade. The President has no direct control over inflation. Harris wants to challenge “price gougers”, which has little to do with actual inflation. I expect both candidates to tolerate large deficits in order to fulfill campaign promises and other objectives. That will put pressure on credit markets and is likely to be inflationary if bond investors are surprised by the higher trajectory of permanent government indebtedness, or if the Federal Reserve monetizes increasing amounts of federal debt. Deficits are likely to be larger under Trump than Harris due in large part to differences in their tax plans, but I’m skeptical that Harris will hold spending in check. Trump’s policies are more growth oriented, and these along with his energy policies and deregulatory actions could limit the inflationary consequences of his spending and tax policies. Higher tariffs will not be of much help in funding larger deficits, and in fact they will be inflationary. Harris: C; Trump: C

Federal Reserve Independence: Harris would undoubtedly like to have the Fed partner closely with the Treasury in funding federal spending. Her appointments to the Board would almost certainly lead to a more activist Fed with a willingness to tolerate rapid monetary expansion and inflation. Trump might be even worse. He has signaled disdain for the Fed’s independence, and he would be happy to lean on the Fed to ease his efforts to fulfill promises to special interests. Harris: D; Trump: F

Entitlement Reform: Social Security and Medicare are both insolvent and benefits will be cut in 2035 without reforms. Harris would certainly be willing to tax the benefits of higher-income retirees more heavily, and she would likely be willing to impose FICA and Medicare taxes on incomes above current earning limits. These are not my favorite reform proposals. Trump has been silent on the issue except to promise no cuts in benefits. Harris: C-; Trump: F

Health Care: Harris is an Obamacare supporter and an advocate of expanded Medicaid. She favors policies that would short-circuit consumer discipline for health care spending and hasten the depletion of the already insolvent Medicare and Medicaid trust funds. These include a $2,000 cap on health care spending for Americans on Medicare, having Medicare cover in-home care, and extending tax credits for health insurance premia. She supports funding to address presumed health care disparities faced by black men. She also promises efforts to discipline or supplant pharmacy benefit managers. Trump, for his part, has said little about his plans for health care policy. He is not a fan of Obamacare and he has promised to take on Big Pharma, whatever that might mean. I fear that both candidates would happily place additional controls of the pricing of pharmaceuticals, a sure prescription for curtailed research and development and higher mortality. Harris: F; Trump: D+

Abortion: The Supreme Court’s 2022 decision in Dobbs v. Jackson essentially relegated abortion law to individual states. That’s consistent with federalist principles, leaving the controversial balancing of abortion vs. the unborn child’s rights up to state voters. Geographic differences of opinion on this question are dramatic, and Dobbs respects those differences. Trump is content with it. Meanwhile, Harris advocates for the establishment of expanded abortion rights at the federal level, including authorization of third trimester abortions by “care providers”. And Harris does not believe there should be religious exemptions for providers who do not wish to offer abortion services. No doubt she also approves of federally funded abortions. Harris: F; Trump: A

Housing: The nation faces an acute housing shortage owing to excessive regulation that limits construction of new or revitalized housing. These excessive rules are primarily imposed at the state and local level. While the federal government has little direct control over many of these decisions, it has abetted this regulatory onslaught in a variety of ways, especially in the environmental arena. Harris is offering stimulus to the demand side through a $25,000 housing tax credit for first-time home buyers. This will succeed in raising the cost of housing. She has also called for heavier subsidies for developers of low-income housing. If past is prologue, this might do more to line the pockets of developers than add meaningfully to the stock of affordable housing. Harris also favors rent controls, a sure prescription for deterioration in the housing stock, and she would prohibit software allowing landlords to determine competitive neighborhood rents. Trump has called for deregulation generally and would not favor rent controls. Harris: F; Trump B

Taxes: Harris has broached several wildly destructive tax proposals. Perhaps the worst of these is to tax unrealized capital gains, and while she promises it would apply only to extremely wealthy taxpayers, it would constitute a wealth tax. Once that line is crossed, the threat of widening the base becomes a very slippery slope. It would also be a strong detriment to domestic capital investment and economic growth. Harris would increase the top marginal personal tax rate and the corporate tax rate, which would discourage investment and undermine real wage growth. She’d also increase estate tax rates. As discussed above, she unwisely calls for a $25,000 tax credit for first-time homebuyers. She also wants to expand the child care tax credit to $6,000 for families with newborns. A proposed $50,000 small business tax credit would allow the federal government to subsidize and encourage risky entrepreneurial activity at taxpayers’ expense. I’m all for small business, but this style of industrial planning is bonkers. She would sunset the Trump (TCJA) tax cuts in 2026.

Finally, Harris has mimicked Trump in calling for no taxes on tips. Treating certain forms of income more favorably than others is a recipe for distortions in economic activity. Employers of tip-earning workers will find ways to shift employees’ income to tips that are mandatory for patrons. It will also skew labor supply decisions toward occupations that would otherwise have less economic value. But Trump managed to find an idea so politically seductive that Harris couldn’t resist.

Trump’s tax plans are a mixed bag of good and bad ideas. They include extending his earlier tax cuts (TCJA) and restoring the SALT deduction. The latter is an alluring campaign tidbit for voters in high-tax states. He would reduce the corporate tax rate, which I strongly favor. Corporate income is double-taxed, which is a detriment to growth as well as a weight on real wages. He would eliminate taxes on overtime income, another example of favoring a particular form of income over others. Wage earners would gain at the expense of salaried employees, so one could expect a transition in the form employees are paid over time. Otherwise, the classification of hours as “overtime” would have to be standardized. One could expect existing employees to work longer hours, but at the expense of new jobs. Finally, Trump says Social Security benefits should not be taxed, another kind of special treatment by form of income. This might encourage early retirement and become an additional drain on the Social Security Trust Fund.

The higher tariffs promised by Trump would collect some revenue. I’d be more supportive of this plank if the tariffs were part of a larger transition from income taxes to consumption taxes. However, Trump would still like to see large differentials between tariffs and taxes imposed on the consumption of domestically-produced goods and services.

Harris: F; Trump C+

Climate Policy: This topic has undergone a steep decline in relative importance to voters. Harris favors more drastic climate interventions than Trump, including steep renewable subsidies, EV mandates, and a panoply of other initiatives, many of which would carry over from the Biden Administration. Harris: F; Trump: B

Energy: Low-cost energy encourages economic growth. Just ask the Germans! Consistent with the climate change narrative, Harris wishes to discourage the use of fossil fuels, their domestic production, and even their export. She has been very dodgy with respect to restrictions on fracking. Her apparent stance on energy policy would be an obvious detriment to growth and price stability (or I should say a continuing detriment). Trump wishes to encourage fossil fuel production. Harris: F; Trump: A

Constitutional Integrity: Harris has supported the idea of packing the Supreme Court, which would lead to an escalating competition to appoint more and more justices with every shift in political power. She’s also disparaged the Electoral College, without which many states would never have agreed to join the Union. Under the questionable pretense of “protecting voting rights”, she has opposed steps to improve election integrity, such voter ID laws. And operatives within her party have done everything possible to register non-citizens as voters. Harris: F; Trump: A

First Amendment Rights: Harris has called for regulation and oversight of social media content and moderation. A more descriptive word for this is censorship. Trump is generally a free speech advocate. Harris: F; Trump A-

Second Amendment Rights: Harris would like to ban so-called “assault weapons” and high-capacity magazines, and she backs universal background checks for gun purchases. Trump has not called for any new restrictions on gun rights. Harris: F; Trump: A

DEI: Harris is strongly supportive of diversity and equity initiatives, which have undermined social cohesion and the economy. That necessarily makes her an enemy of merit-based rewards. Trump has no such confusion. Harris: F; Trump: A

Hysteria: The Harris campaign has embraced a strategy of demonizing Donald Trump. Of course, that’s not a new approach among Democrats, who have fabricated bizarre stories about Trump escapades in Russia, Trump as a pawn of Vladimir Putin, and Russian manipulation of the 2016 Trump campaign. Congressional democrats spent nearly all of Trump’s first term in office trying to find grounds for impeachment. Concurrently, there were a number of other crazy and false stories about Trump. The current variation on “Orange Man Bad” is that Trump is a fascist and a Nazi, and that all of his supporters are Nazis. And that Trump will use the military against his domestic political opponents, the so-called “enemy within”. And that Trump will send half the country’s populace to labor camps. The nonsense never ends, but could anything more powerfully ignite the passions of violent extremists than this sort of hateful rhetoric? Would it not be surprising if at least a few leftists weren’t interested in assassinating “Hitler” himself. This is hysteria, and one has to wonder if that is not, in fact, the intent.

Can any of these people actually define the term fascist? Most fundamentally, a fascist desires the use of government coercion for private gain (of wealth or power) for oneself and/or one’s circle of allies. By that definition, we could probably categorize a great many American politicians as fascists, including Barack Obama, Joe Biden, Donald Trump, and a majority of both houses of Congress. That only demonstrates that corporatism is fundamental to fascist politics. Less-informed definitions of fascism conflate it with everything from racism (certainly can play a part) and homophobia (certainly can play a part) to mere capitalism. But take a look at the demographics of Trump’s supporters and you can see that most of these definitions are inapt.

Is the Trump campaign suffering from any form of hysteria? It’s shown great talent at poking fun at the left. Of course, Trump’s reactions to illegal immigration, crime, and third-trimester abortions are construed by leftists to be hysterical. I mean, why would anyone get upset about those kinds of things?

Harris: F; Trump: A

“Grade Point Average”

I’m sure I forgot an area or two I should have covered. Anyway, the following are four-point “GPAs” calculated over 20 categories. I’m deducting a quarter point for a “minus” grade and adding a quarter point for a “plus” grade. Here’s what I get:

Harris: 0.44; Trump: 2.68

Hmmm

Big Spending, Explosive Debt, and the Inflation Tax

07 Tuesday May 2024

Posted by Nuetzel in Deficits, Fiscal policy, Inflation

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American Rescue Plan, CBO, Child Tax Credit, CHIPS Act, Debt to GDP, Discretionary Spending, Donald Trump, Emergency Spending, entitlements, Eric Boehm, Inflation Premium, Inflation tax, Infrastructure Investment and Jobs Act, Joe Biden, John Cochrane, Medicare, OMB, Promise to Address Comprehensive Toxics Act, Social Security, Soft Default, Student Loan Forgiveness, Supreme Court, Treasury Debt

The chart above makes a convincing case that we have a spending problem at the federal level. Really, we’ve had a spending problem for a long time. But at least tax revenue today remains reasonably well-aligned with its 50-year historical average as a share of GDP. Not spending. Even larger deficits opened up during the pandemic and they haven’t returned to pre-pandemic levels.

We’ve seen Joe Biden break spending records. His initiatives, often with questionable merit, have included the $1.8 trillion American Rescue Plan and the nearly $0.8 trillion Infrastructure Investment and Jobs Act, along with several other significant spending initiatives such as the Promise to Address Comprehensive Toxics Act and the subsidy-laden CHIPS Act. Meanwhile, emergency spending has become a regular occurrence on Biden’s watch. More recently, he’s made repeated efforts to forgive massive amounts of student loans despite the Supreme Court’s clear ruling that such gifts are unconstitutional.

Indeed, while Biden keeps pretty busy spinning tales of his days driving an 18-wheeler, cannibals devouring his Uncle Bosie Finnegan, his upbringing in black churches, synagogues, or in the Puerto Rican community, he still finds time to dream up ways for the government to spend money it doesn’t have. Or his kindly puppeteers do.

Biden’s New Budget

Eric Boehm expressed wonderment at Biden’s fiscal 2025 budget not long after its release in March. He was also mystified by the gall it took to produce a “fact sheet” in which the White House congratulated itself on fiscal responsibility. That’s how this Administration characterizes deficits projected at $16 trillion over the next ten years. No joke!

Furthermore, the Administration says the record spending will be “paid for”. Well, yes, with tax increases and lots of borrowing! There are a great many fabulist claims made by the White House about the budget. This link from the Office of Management and Budget includes a handy list of propaganda sheets they’ve managed to produce on the virtues of their proposal.

The Congressional Budget Office (CBO) projects ten-year deficits under current law that are $3 trillion higher than Biden’s proposed budget. That’s the basis of the White House’s boast of fiscal restraint. But the difference is basically paid for with a couple of accounting tricks (see below). More charitably, one could say it’s paid for with higher taxes, aided by the assumption of slightly faster economic growth. The latter will be a good trick while undercutting incentives and wages with a big boost to the corporate tax rate.

The revenue projected by the While House from those taxes does not come anywhere close to eliminating the gap shown in the CBO’s chart above. Federal spending under Biden’s budget grows at about 4% annually, just a bit slower than nominal GDP. Thus, the federal share of GDP remains roughly constant and only slightly higher than the CBO’s current projection for 2034. Nevertheless, spending relative to GDP would continue at an historically high rate. Over the next decade, it would average more than 3% higher than its 50-year average. That would be about $1.3 trillion in 2034!

Meanwhile, the ratio of tax revenue to GDP under Biden’s proposal, as they project it, would average slightly higher than its 50-year average, reaching a full percentage point above by 2034 (and higher than the CBO baseline). That’s probably optimistic.

There is little real effort in this budget to reduce federal deficits, with Treasury borrowing rates now near 15-year highs. Interest expense has grown to an alarming share of spending. In fact, it’s expected to exceed spending on defense in 2024! Perhaps not coincidentally, the White House assumes a greater decline in interest rates than CBO over the next 10 years.

Treats or Tricks?

The situation is likely worse than the White House depicts, given that its budget incorporates assumptions that look generous to their claim of fiscal restraint. First, they frontload nondefense discretionary spending, allowing Biden to make extravagant promises for the near-term while pushing off steep declines in budget commitments to the out-years. The sharp reductions in this category of spending pares more than $2 trillion from the 10-year deficit. From the link above:

Biden also proposes to restore the expanded the child tax credit — for one year! How handy from a budget perspective: heroically call for an expanded credit (for a year) while avoiding, for the time being, the addition of a couple of trillion to the 10-year deficit.

Code Red

So where does this end? The ratio of federal debt to GDP will resume its ascent after a slight decline from the pandemic high. Here is the CBO’s projection:

The Biden budget shows a relatively stable debt to GDP ratio through 2034 due to the assumptions of slightly faster GDP growth, lower Treasury borrowing rates, and the aforementioned “fiscal restraint”. But don’t count on it!

The government’s growing dominance over real resources will have negative consequences for growth in the long-term. Purely as a fiscal matter, however, it must be paid for in one of three ways: revenue from explicit taxes, federal borrowing, or an implicit tax on the public more commonly known as the inflation tax. The last two are intimately related.

Bond investors always face at least a small measure of default risk even when lending to the U.S. Treasury. There is almost no chance the government would ever default outright by failing to pay interest or principal when due. However, investors hold an expectation that the value of their bonds will erode in real terms due to inflation. To compensate, they demand an “inflation premium” in the interest rate they earn on Treasury bonds. But an upside surprise to inflation would constitute a “soft default” on the real value of their bonds. This occurred during and after the pandemic, and it was triggered by a burgeoning federal deficit.

Brief Mechanics

John Cochrane has explained the mechanism by which acts of fiscal profligacy can be transmitted to the price of goods. The real value of outstanding federal debt cannot exceed the expected real value of future surpluses (a present value summed across positive and negative surpluses). If expected surpluses are reduced via some emergency or shock such that repayment in real terms is less likely, then the real value of government debt must fall. That means either interest rates or the price level must rise, or some combination of the two.

The Federal Reserve can prevent interest rates from rising (by purchasing bonds and increasing the money supply), but that leaves a higher price level as the only way the real value of debt can come into line. In other words, an unexpected increase in the path of federal deficits would be financed by money printing and an inflation tax. The incidence of this unexpected “implicit” tax falls not only to bondholders, but also on the public at large, who suffer an unexpected decline in the purchasing power of their nominal assets and incomes. This in turn tends to free-up real resources for government absorption.

Government Debt Is Risky

It appears that investors expect the future deficits now projected by the CBO (and the White House) to be paid down someday, to some extent, by future surpluses. That might seem preposterous, but markets apparently aren’t surprised by the projected deficits. After all, fiscal policy decisions can change tremendously over the course of a few years. But it still feels like excessive optimism. Whatever the case, Cochrane cautions that the next fiscal emergency, be it a new pandemic, a war, a recession, or some other crisis, is likely to create another huge expansion in debt and a substantial increase price level. Joe Biden doesn’t seem inclined to put us in a position to deal with that risk very effectively. Unfortunately, it’s not clear that Donald Trump will either. And neither seems inclined to seriously address the insolvencies of Social Security and Medicare. If unaddressed, those mandatory obligations will become real crises over the next decade.

Musings and Misgivings of a Likely Trump Voter

24 Thursday Aug 2023

Posted by Nuetzel in Politics

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Comparative advantage, corporate taxes, Corporatism, Donald Trump, eminent domain, Energy Production, Entitlement Reform, Illegal Immigration, Industrial Policy, Inflation tax, Legal Immigration, Medicare, Modern Monetary Theory, Nationalism, Populism, Protectionism, Social Security, Spending Growth, statism, The Wall

Choosing between the lesser of evils is a bummer, but that’s often the reality for voters. That goes almost without saying… our choices are politicians! I’ll certainly be in that quandary if Donald Trump is the Republican nominee for president in 2024, which looks increasingly likely. I held my nose and voted for him — twice — primarily because the Big Government solutions promoted consistently by Democrats are so awful.

At this point I’m not fully on board with any GOP candidate. That could change, but not yet. Now, if you’re a Trump supporter and you think the rambling opinions below are too critical of your guy, cut me some slack. I’m not a “Never Trumper”. I’m a “Never Statist”. And while I’ve never had much faith that Trump is with me on that count, he will almost surely be the lesser of evils.

The Abused Politician

Trump has been subjected to despicable treatment by political opponents since well before his inauguration in 2016, and his abusers in and out of government never let up. Many of the charges and accusations against him have been pure fiction and at this point represent obvious election interference. So I’m somewhat sympathetic to him despite some of his positions and often disagreeable manner. Still, I credit him for being a fighter, and as an aside, I’ll add that I actually enjoy some of his rants. He has the style of a nasty stand-up comic, which gives me some occasional laughs.

I agree with Trump on certain policy matters. On others, including some fundamental points, I find it hard to trust him as a leader, and I said that long before he was elected in 2016. He claims not to be a politician, but he is a politician through and through. He’s also a populist. And while populism can serve as a valuable check on certain excesses of government, it often cuts the wrong way, favoring what I like to call “do-somethingism”. That usually means public intervention. Populism is a perfectly natural home for a “pick-and-choose” statist like Trump, however. Moreover, I’m not happy that he refused to debate his opponents, and that too was a purely political decision.

Malign Neglect

If you need proof of Trump’s base instincts as a politician, look no further than his refusal to engage on the subject of entitlement reform. It’s no secret that both Social Security (SS) and Medicare are technically insolvent. This is probably the most important fiscal issue the country will face in the foreseeable future.

Without reform, SS benefits will be cut 23% in 2034. That would bring certain outrage among seniors and anyone approaching retirement. Sure, it’s a decade down the road, but addressing it sooner would be far less painful. Does Trump favor a huge cut in benefits? Probably not. Does he think benefits can simply continue without additional funding or reform of some kind? Does he prefer a greater inflation tax, rather than reform? Does he secretly favor “just print the money” like the modern monetary theorists of the Left? There are much better alternatives, but where is his leadership on this issue?

His unwillingness to discuss entitlements, and indeed, his denigration of anyone who so much as mentions the need for serious reforms, is a disgrace. He knows the train wreck is coming, but his focus is squarely on short-term politics. Why are so many on the Right willing to fall for this? Maybe they too understand it’s an elephant in the room, but an elephant that must not be named. After all, it’s not as if the Democrats have done a thing to address the issue.

False Fealty to Workers

Trump is a protectionist, given to the mercantilist fallacy that only exports are good and imports are bad. We import heavily because we are a high-income nation. The other side of that coin is that the world craves our assets, including the U.S. dollar (which is in absolutely no danger of losing its dominance as the primary currency of international transactions).

Here’s a little truth from “Trade Flows 101”: U.S. imports of goods and services correspond to purchases of U.S. assets by the rest of the world. In other words, U.S. trade deficits present opportunities for foreign investors to supply us with capital. That helps foster greater U.S. productive capacity, greater worker productivity, and higher wages.

On the other hand, government intervention to discourage imports via quotas or tariffs increases domestic prices and erodes real wages in the U.S. Furthermore, to favor certain industries (exporters) over others (importers) is a grotesque application of corporatist industrial policy. Why does the Right tolerate Trump’s advocacy for this sort of government central planning? Part of the answer is national security, which I accept to a limited extent, but not when “critical industries” are extended favors by government that are redundant to already powerful market forces.

Protectionism owes some of its popularity to the appeal of nationalism, as distinct from patriotism. However, it promotes sclerosis among domestic producers by shielding them from competition, causing direct harm to U.S. consumers. There is nothing patriotic about protectionism.

Real Stuff

A fallacy closely related to protectionism, and one to which Trump subscribes, is that the U.S. must produce more “things” — more commodities and manufactured goods. That’s not the market’s judgement, but one that appeals to the instincts of interventionists. In any case, services are often more highly valued than physical goods. If your comparative advantage is in producing a highly-valued service, don’t beat yourself up over neglecting to produce hard goods at which you’re comparatively lousy. Specialization and trade are under-appreciated as true social and economic miracles.

That said, we certainly have an advantage in the production of fossil fuels and should continue to produce them without interference. I’m with Trump on that. One day, reliable sources of “clean” energy will be economic, but we’re not there yet.

Corporate State

Well before his presidential run, Trump had a history of leveraging government to achieve his private ends. Eminent domain actions were useful to his development projects and expanding his own property rights at the expense of others. Naturally, he claimed his projects were in the public interest. Ah, the mindset of a rent seeker: government exists to actively facilitate the acquisitive interests of private business, or at least the “winners”. That thinking is thoroughly contrary to the libertarian view of the state’s role in establishing a neutral social environment under the rule-of-law.

In other ways, as President, Trump sought to bring major corporations under his political sway. Trump’s protectionist leanings as president were a prime example of corporatism in action. And read this account of a public meeting (and watch it at the link) at which one CEO after another, under Trump’s furrowed gaze, took turns describing something great they were doing for the country and committing to do more. It was one big, weird suck-up session intended to make the puffed-up Trump look like a great leader. As the author at the link says:

“These are corporate executives doing the President’s bidding for fear or favour.”

I supported Trump’s tax cuts, though they were certainly designed to reduce taxes on corporate income. Was this corporatist largess? That might have been part of his motivation. However, as I’ve argued before, corporate income is largely double-taxed. Moreover, shareholders do not bear the full burden of corporate taxes. Workers bear a significant portion of the burden, so Trump’s corporate tax cuts encouraged growth in real wages, whether he understood it or not.

It’s Still So Big

Tax cuts paired with reduced spending would have been a welcome approach. Unfortunately, Trump was a fairly big spender during his term in office, even if you exclude Covid emergency spending. Growth in the government’s dominance over resources did not slow on his watch. Fiscally disciplined he’s not!

It’s true that his administration made efforts to curtail regulation, but in retrospect, those steps at best arrested the growth of regulation, rather than achieving reductions. The hope of seeing any real deconstruction of the administrative state under Trump was fleeting.

Migration

Immigration is a complicated issue when it comes to assessing Trump’s candidacy. I’m strongly in favor of greater legal immigration because it would improve our demographics and labor supply while shrinking our entitlements deficits. Legal migrants are often technically proficient and many come with sponsorships. On the whole, legal migrants tend to be ready and willing to work,

This position is often condemned by Trump’s most ardent cheerleaders, however. I’ve generally supported Trump’s position on illegal immigration as a matter of national security, to eliminate human trafficking, and to reduce burdens on public aid and support systems. Unfortunately, during Trump’s presidency, he did more to reduce legal immigration than illegal immigration. I have no qualms about “the Wall” except for its expense and the likelihood that cheaper and superior technologies could be deployed for border security. Trump might prefer the Wall’s symbolic value.

Rightly or wrongly, Trump’s messaging on immigration strikes many as nativist, providing an easy excuse for the Left to accuse him of racism. That certainly won’t help his election prospects.

Conclusion

Trump will almost surely be the GOP nominee, unless Democrats succeed in putting him behind bars by then. If the choice is Trump vs. almost any Democrat I can imagine, I’ll have to vote for him. For all his faults and wild card qualities, I still consider him a safer alternative than the devils we know on the Left. But I’d feel much better about him if he’d take a responsible position on Social Security and Medicare reform, abandon protectionism except in cases of critical national security needs (and without overkill), commit to spending reductions, and adopt a more productive approach to legal immigration.

Health Care & Education: Slow Productivity Growth + Subsidies = Jacked Prices

14 Sunday May 2023

Posted by Nuetzel in Education, Health Care, Priductivity

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Abundance Agenda, Alex Tabarrok, Baumol's Disease, Beethoven’s String Quartet No. 14, CHIPS, competition, Consumer Sovereignty, Education Cost, Education Grants, Education Productivity, Employer-Paid Coversge, Eric Helland, Exchange subsidies, health care costs, Health Care Productivity, Industrial Concentration, Mark Perry, Medicaid, Medical Technology, Medicare, Obamacare, Peter Suderman, Relative Prices, Slow Productivity Growth, Student Loans, Subsidies, Tax Subsidies, third-party payments, Willian Baumol

This post is about relative prices in two major sectors of the U.S. economy, both of which are hindered by slow productivity growth while being among the most heavily subsidized: education and health care. Historically, both sectors have experienced rather drastic relative price increases, as illustrated for the past 20 years in the chart from Mark Perry above.

Baumol’s Cost Disease

These facts are hardly coincidental, though it’s likely the relative costs education and health care would have risen even in the absence of subsidies. Over long periods of time, the forces primarily guiding relative price movements are differentials in productivity growth. The tendency of certain industries to suffer from slow growth in productivity is the key to something known among economists as Baumol’s Disease, after the late William Baumol, who first described the phenomenon’s impact on relative prices.

Standards of living improve when a sufficient number of industries enjoy productivity growth. That creates a broad diffusion of new demands across many industries, including those less amenable to productivity growth, such as health care and education. But slow productivity growth and rising demand in these industries are imbalances that push their relative prices upward.

Alex Tabarrok and Eric Helland noted a few years ago that it took four skilled musicians 44 minutes to play Beethoven’s String Quartet No. 14 in 1826 and also in 2010, but the inflation-adjusted cost was 23 times higher. Services involving a high intensity of skilled labor are more prone to Baumol’s Disease than manufactured goods. As well, services for which demand is highly responsive to income or sectors characterized by monopoly power may be more prone to Baumol’s disease.

Tabarrok wonders whether we should really consider manifestations of Baumol’s Disease a blessing, because they show the extent to which productivity and real incomes have grown across the broader economy. So, rather than blame low productivity growth in certain services for their increasing relative prices, we should really blame (or thank) the rapid productivity growth in other sectors.

The Productivity Slog

There are unavoidable limits to the productivity growth of skilled educators, physicians, and other skilled workers in health care. Again, in a growing economy, prices of things in relatively fixed supply or those registering slow productivity gains will tend to rise more rapidly.

Technology offers certain advantages in some fields of education, but it’s hard to find evidence of broad improvement in educational success in the U.S. at any level. In the health care sector, new drugs often improve outcomes, as do advances in technologies such as drug delivery systems, monitoring devices, imaging, and robotic surgery. However, these advances don’t necessarily translate into improved capacity of the health care system to handle patients except at higher costs.

There’s been some controversy over the proper measurement of productivity in the health care sector. Some suggest that traditional measures of health care productivity are so flawed in capturing quality improvements that the meaning of prices themselves is distorted. They conclude that adjusting for quality can actually yield declines in effective health care prices. I’d interject, however, that patients and payers might harbor doubts about that assertion.

Other investigators note that while real advances in health care productivity should reduce costs, the degree of success varies substantially across different types of innovations and care settings. In particular, innovations in process and protocols seem to be more effective in reducing health care expenditures than adding new technologies to existing protocols or business models. All too often, medical innovations are of the latter variety. Ultimately, innovations in health care haven’t allowed a broader population of patients to be treated at low cost.

Superior Goods

Therefore, it appears that increases in the relative prices of education and health care over time have arisen as a natural consequence of the interplay between disparities in productivity growth and rising demand. Indeed, this goes a long way toward explaining the high cost of health care in the U.S. compared to other developed nations, as standards of living in the U.S. are well above nearly all others. In that respect, the cost of health care in the U.S. is not necessarily alarming. People demand more health care and education as their incomes rise, but delivering more health care isn’t easy. To paraphrase Tabarrok, turning steelworkers into doctors, nurses and teachers is a costly proposition.

The Role of Subsidies

In the clamor for scarce educational and health care resources, natural tensions over access have spilled into the political sphere. In pursuit of distributing these resources more equitably, public policy has relied heavily on subsidies. It shouldn’t surprise anyone that subsiding a service resistant to productivity gains will magnify the Baumol effect on relative price. One point is beyond doubt: the amounts of these subsidies is breathtaking.

Education: Public K -12 schools are largely funded by local taxpayers. Taxpayer-parents of school-aged children pay part of this cost whether they send their children to public schools or not. If they don’t, they must pay the additional cost of private or home schooling. This severely distorts the link between payments and the value assigned by actual users of public schools. It also confers a huge degree of market power to public schools, thus insulating them economically from performance pressures.

Public K – 12 schools are also heavily subsidized by state governments and federal grants. The following chart shows the magnitude and growth of K – 12 revenue per student over the past couple of decades.

Subsidies for higher education take the form of student aid, including federal student loans, grants to institutions, as well as a variety of tax subsidies. Here’s a nice breakdown:

This represents a mix of buyer and seller subsidies. That suggests less upward pressure on price and more stimulus to output, but we still run up against the limits to productivity growth noted above. Moreover, other constraints limit the effectiveness of these subsidies, such as lower academic qualifications in a broader student population and the potential for rewards in the job market to diminish with a potential excess of graduates.

Health care: Subsidies here are massive and come in a variety of forms. They often directly provide or reduce the cost of health insurance coverage: Medicaid, the Children’s Health Insurance Program (CHIP), Obamacare exchange subsidies, Medicare savings programs, tax-subsidies on employer-paid health coverage, and medical expense tax deductions. Within limits, these subsidies reduce the marginal cost of care patients are asked to pay, thus contributing to over-utilization of various kinds of care.

The following are CBO projections from June 2022. They are intended here to give an idea of the magnitude of health care insurance subsidies:

Still Other Dysfunctions

There are certainly other drivers of high costs in the provision of health care and education beyond a Baumol effect magnified by subsidies. The third-party payment system has contributed to a loss of price discipline in health care. While consumers are often responsible for paying at least part of their health insurance premiums, the marginal cost of health care to consumers is often zero, so they have little incentive to manage their demands.

Another impediment to cost control is a regulatory environment in health care that has led to a sharply greater concentration of hospital services and the virtual disappearance of independent provider practices. Competition has been sorely lacking in education as well. Subsidies flowing to providers with market power tend to exacerbate behaviors that would be punished in competitive markets, and not just pricing.

Summary

Baumol’s Disease can explain a lot about the patterns of relative prices shown in the chart at the top of this post. That pattern is a negative side effect of general growth in productivity. Unfortunately, it also reflects a magnification engendered by the payment of subsidies to sectors with slow productivity growth. The intent of these subsidies is to distribute health care and education more equitably, but the impact on relative prices undermines these objectives. The approach forces society to exert wasted energy, like an idiotic dog chasing its tail.

Peter Suderman wrote an excellent piece in which he discussed health care and education subsidies in the context of the so-called “abundance agenda”. His emphasis is on the futility of this agenda for the middle class, for which quality education and affordable health care always seem just out of reach. The malign effects of “abundance” policies are reinforced by anti-competitive regulation and payment mechanisms, which subvert market price discipline and consumer sovereignty. We’d be far better served by policies that restore consumer responsibility, deregulate providers, and foster competition in the delivery of health care and education.

The Dreaded Social Security Salvage Job

24 Friday Mar 2023

Posted by Nuetzel in Privatization, Social Security

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Angus King, Bernie Sanders, Bill Cassidy, COLAs, Discretionary Spending, Donald Trump, Entitlement State, Federal Asset Sales, FICA Tax, George W. Bush, Insolvency, Internal Rate of Return, Joe Manchin, John Kennedy, Lump-Sum Payouts, Medicare, Mike Pence, Non-Discretionary Spending, OASDI, Opt-Out, Paygo, Payroll Tax, Present Value, Private Accounts, Privatization, Redistribution, Robert Shiller, Seeking Alpha, Social Security, Social Security Trust Fund, Todd Henderson, Universal Basic Income

Government budget negotiations never fail to frustrate anyone of a small-government persuasion. We have a huge, ongoing federal budget deficit. Spending’s gone bat-shit out of control over the past several years and too few in Congress are willing to do anything about it. Democrats would rather see politically-targeted tax increases. While some Republicans advocate spending cuts, the focus is almost entirely on discretionary spending. Meanwhile, the entitlement state is off the table, including Social Security reform.

Fiscal Indiscretion

Sadly, non-discretionary outlays (entitlements) today make a much larger contribution to the deficit than discretionary spending. That includes the programs like Social Security (SS) and Medicare, in which spending levels are programmatic and not subject to annual appropriations by Congress. When these programs were instituted there were a large number of workers relative to retirees, so tax contributions exceeded benefit levels for many decades. The revenue excesses were placed into “trust funds” and invested in Treasury debt. In other words, surpluses under non-discretionary SS and Medicare programs were used to finance discretionary spending!

The aging of Baby Boomers ultimately led to a reversal in the condition of the trust funds. Fewer workers relative to retirees meant that annual payroll tax collections were not adequate to cover annual benefits, and that meant drawing down the trust funds. Current projections by the system trustees call for the SS Trust Fund to be exhausted by 2035. Once that occurs, benefits will automatically be reduced by roughly 20% unless Congress acts to shore up the system before then.

A Few Proposals

I’ve written about the need for SS reform on several occasions (though the first article at that link is not germane here). It seems imperative for Congress and the President to address these shortfalls. By all appearances, however, many Republicans have put the issue aside. For his part, Joe Biden has apparently accepted the prospect of an automatic reduction in benefits in 2035, or at least he’s willing to kick that can down the road. He has, however, endorsed taxes on high earners to fund Medicare. Senator John Kennedy (R-LA) suggests raising the retirement age, or at least raise the minimum age at which one may claim benefits (now 62). Senators Bill Cassidy (R-La.) and Angus King (I-Maine) were working on a compromise that would create an investment fund to fortify the system, but the specifics are unclear, as well as how much that would accomplish.

Meanwhile, Senator Bernie Sanders (S-VT) proposes to expand SS benefits by $2,400 a year and add funding by extending payroll taxes to earners above the current limit of $160,000. Senator Joe Manchin (D-WV) has endorsed the latter as a “quick fix”.

There is also at least one proposal in Congress to end the practice of taxing a portion of SS benefits as income. I have trouble believing it will gain wide support, despite the clear double-taxation involved.

Then there are always discussions of reducing benefits at higher income levels or even means-testing benefits. In fact, it would be interesting to know what proportion of current benefits actually function as social insurance, as opposed to a universal entitlement. The answer, at least, could serve as a baseline for more fundamental reforms, including changes in the structure of payroll taxes, voluntary lump-sum payouts, and private accounts.

More Radical Views

There are a few prominent voices who claim that SS is sustainable in its current form, but perhaps with a few “no big deal” tax increases. Oh, that’s only about a $1 trillion “deal”, at least for both Medicare and SS. More offensive still are the scare tactics used by opponents of SS reform any time the subject comes up. I’m not aware of any serious reform proposal made over the past two decades that would have affected the benefits of anyone over the age of 55, and certainly no one then-eligible for benefits. Yet that charge is always made: they want to cut your SS benefits! The Democrats made that claim against George W. Bush, torpedoing what might have been a great accomplishment for all. And now, apparently Donald Trump is willing to use such accusations to damage any rival who has ever mentioned reform, including Mike Pence. Will you please cut the crap?

The System

The thing to remember about SS is that it is currently structured as a pay-as-you-go (PAYGO) system, despite the fact that benefits are defined like many creaky private pensions of old. SS benefits in each period are paid out of current “contributions” (i.e., FICO payroll taxes) plus redemptions of government bonds held in the Trust Fund. Contributions today are not “invested” anywhere because they are not enough to pay for current benefits under PAYGO.

The Trust Fund was accumulated during the years when favorable demographics led to greater FICO contributions than benefit payouts. The excess revenue was “invested” in Treasury bonds, which meant it was used to fund deficits in the general budget. It’s been about 15 years since the Trust Fund entered a “draw-down” status, and again, it will be exhausted by 2035.

SSA Says It’s a Good Deal

A participant’s expected “rate of return” on lifetime payroll tax payments depends on several things: lifetime earnings, age at which benefits are first claimed, life expectancy at that time, marital status, relative earning levels within two-earner couples, and the “full retirement age” for the individual’s birth year. Payroll tax payments, by the way, include the employer’s share because that is one of the terms of a hire. A high rate of return is not the same as a high level of benefits, however. In fact, relative to career income, SS has a great deal of progressivity in terms of rates of return, but not much in terms of benefit levels.

The Social Security Administration (SSA) has calculated illustrative real internal rates of return (IRR) for many categories of earners given certain assumptions. (An IRR is a discount rate that equalizes the present value (PV) of a stream of payments and the PV of a stream of payoffs.) The SSA’s most recent update of this exercise was in April 2022. The report references Old Age, Survivors, and Disability Insurance (OASDI), but the focus is exclusively on seniors.

Three basic scenarios were considered: 1) current law, as scheduled, despite its unsustainability; 2) a payroll tax increase from 12.4% (not including the Medicare tax) to 15.96% starting in 2035, when the Trust Fund is exhausted; and 3) a reduction in benefits of 22% starting in 2035.

The authors of the report conclude that “… the real value of OASDI benefits is extraordinarily high.” This theme has been echoed by several other writers, such as here and here. This conclusion is based on a comparison to returns earned by investments that SSA judges to have comparably low risk.

I note here that I’ve made assertions in the past about relative SS returns based on nominal benefits, rather than inflation-adjusted values. Those comparisons to private returns might have seemed drastic because they were expressed in terms of hypothetical future nominal values at the point of retirement. The gaps are not as large in real terms or if we consider SS returns broadly to include those accruing to low career earners. Medium and high earners tend to earn lower hypothetical returns from SS.

A Mixed Bag

SSA’s calculated IRRs are highest for one-earner couples followed by two-earner couples. Single males do relatively poorly due to their higher mortality rates. Low earners do very well relative to higher earners. Earlier birth years are associated with higher IRRs, but these are not as impressive for cohorts who have not yet claimed benefits. The ranges of birth years provided in the report make this a little imprecise, but I’ll focus on those born in 1955 and later.

Of course the returns are highest under the current law hypothetical than for the scenarios involving a benefit reduction or a payroll tax hike. The current law IRRs can be viewed as baselines for other calculations, but otherwise they are irrelevant. The system is technically insolvent and the scheduled benefits under current law can’t be maintained beyond 2034 without steps to generate more revenue or cut benefits. Those steps will reduce IRRs earned by hypothetical SS “assets” whether they take the form of higher payroll taxes, lower benefits, a greater full retirement age, or other measures.

The tax hike doesn’t have much impact on the IRRs of near-term retirees. It falls instead on younger cohorts with some years of employment (and payroll tax payments) remaining. The effect of a cut in benefits is spread more evenly across age cohorts and the reductions in IRRs is somewhat larger.

With higher payroll taxes after 2034, the average IRRs for birth years of 1955+ range from about 0.5% up to about 6.25%. The returns for single females and two-earner couples are roughly similar and fall between those for single males on the low end and one-earner couples on the high end. In all cases, low earners have much higher IRRs than others.

The reduction in benefits produces returns for the 1955+ age cohorts averaging small, negative values for high-earning single men up to 5.5% to 6% for low-earning, one-earner couples.

But On the Whole…

The IRR values reported by SSA are quite variable across cohorts. Individuals or couples with low earnings can usually expect to “earn” real IRRs on their contributions of better than 3% (and above 5% in a few cases). Medium earners can expect real returns from 1% to 3% (and in some cases above 4%). Many of the returns are quite good for a safe “asset”, but not for high earners.

Again, SSA states that these are real returns, though they provide no detail on the ways in which they adjust the components used in their IRR formula to arrive at real returns. Granting the benefit of the doubt, we saw persistently negative real returns on a range of safe assets in the not-very-distant past, so the IRRs are respectable by comparison.

Qualifications

There are many assumptions in the SSA’s analysis that might be construed as drastic simplifications, such as no divorce and remarriage, uniform career duration, and no relationship between earnings and mortality. But it’s easy to be picky. Many of the assumptions discernible from the report seem to be reasonable simplifications in what could otherwise be an unruly analysis. Nonetheless, there are a few assumptions that I believe bias the IRRs upward (and perhaps a few in the other direction).

In fact, SSA is remarkably non-transparent in their explanation of the details. Repeated checking of SSA’s document for clear answers is mostly futile. Be that as it may, I’m forced to give SSA the benefit of the doubt in several respects. One is the reinvestment of cumulative remaining contributions at the IRR throughout the earning career and retirement. A detailed formula with all components and time subscripts would have been nice.

… And Major Doubts

As to my misgivings, first, the IRRs reported by SSA are based on earners who all reach the age of 65. However, roughly 14% – 15% of individuals who live to be of working age die before they reach the age of 65. Most of those deaths occur in the latter part of that range, after many years of contributions and hypothetical compounding. That means the dollar impact of contributions forfeited at death before age 65 is probably larger than the unweighted share of individuals. These individuals pay-in but receive no retirement benefit in SSA’s IRR framework, although some receive disability benefits for a period of time prior to death. It wouldn’t bother my conscience to knock off at least a tenth of the quoted returns for this consideration alone.

A second major concern surrounds the method of calculating benefits and discounted benefits. SSA assumes that benefits continue for the expected life of the claimant as of age 65. If life expectancy is 19 years at age 65, then “expected” benefits are a flat stream of benefit payments for 19 years. Discounting each payment back to age 65 at the IRR yields one side of the present value equality. This constant cash flow (CCF) treatment is likely to overstate the present value of benefits. Instead of CCFs, each payment should be weighted by the probability that the claimant will be alive to receive it with a limit at some advanced age like 100. CCF overcounts present values up to the expected life, but it undercounts present values beyond the expected life because the assumed CCF benefits then are zero!! Weighting benefit payments by the probability of survival to each age produces continuing additions to the PV, but increasing mortality and decaying discount factors become quite substantial beyond expected life, leading to relatively minor additions to PV over that range. The upshot is that the CCFs employed by SSA overstate PVs by front-loading all benefits earlier in retirement. For a given PV of contributions, an overstated PV of benefits requires a higher (and overstated) IRR to restore the PV equality, and this might be a substantial source of upward bias in SSA’s calculations.

Third, when comparing an SS “asset” to private returns, a big difference is that private balances remaining at death become assets of the earner’s estate. Meanwhile, a single beneficiary forfeits their SS benefits at death (except for a small death benefit), while a surviving spouse having lower benefits receives ongoing payments of the decedent’s benefits for life. This consideration, however, in and of itself, means that private plans have a substantial advantage: the “expected” residual at death can be “optimized” at zero or some higher balance, depending on the strength of the earner’s bequest motive.

Finally, in a footnote, the SSA report notes that their treatment of income taxes on Social Security benefits for claimants with higher incomes might bias some of the IRRs upward. That seems quite likely.

It would be difficult to recast SSA’s report based on adjustments for all of these qualifications. However, it’s likely that the IRRs in the SSA report are sharply overstated. That means many more beneficiaries with medium and higher earnings records would have returns in the 0% to 2% range, with more IRRs in the negative range for singles. Low earners, however, might still get returns in a range of 3% to 5%.

The SSA analysis attempts to demonstrate some limits to the risks faced by participants, given the scenarios involving a payroll tax increase or a benefits reduction in 2035. Nevertheless, there are additional political risks to the returns of certain classes of current and future retirees. For example, payroll taxes could be made much more progressive, benefits could be made subject to means testing, or indexing of benefits could be reduced. In fact, there are additional demographic risks that might confront retirees several decades ahead. Continued declines in fertility could further undermine the system’s solvency, requiring more drastic steps to shore up the system. As a hypothetical asset, by no means is SS “risk-free”.

Better Returns

Now let’s consider returns earned by private assets, which represent investments in productive capital. For stocks, these include the sum of all dividends and capital gains (growth in value). For compounding purposes, we assume that all returns are reinvested until retirement. Remember that private returns are much less variable over spans of decades than over durations of a few years. Over the course of 40 year spans (SSA’s career assumption), private returns have been fairly stable historically, and have been high enough to cushion investors from setbacks. Here is Seeking Alpha on annualized returns on the basket of stocks in the S&P 500:

“… the return on the S&P 500 since the beginning of valuation in 1928, is 10.22%, whereas the inflation-adjusted return on the market since that time is 7.01%…”

That real return would generate benefits far in excess of SS for most participants, but it’s not an adequate historical perspective on market performance. A more complete picture of real returns on the S&P, though one that is still potentially flawed, emerges from this calculator, which relies on data from Robert Shiller. The returns extend back to 1871, but the index as we know it today has existed only since 1957. The earlier returns tend to be lower, so these values may be biased:

Real stock market returns over rolling 40-year time spans varied considerably over this longer period. Still, those kind of stock returns would be superior to the IRRs in the SSA report going forward in all but a few cases (and then only for low and very low earners).

Most workers facing a choice between investing at these rates for 40 years, with market risk, and accepting standard SS benefits, uncertain as they are, couldn’t be blamed for choosing stocks. In fact, if we think of contributions to either type of plan as compounding to a hypothetical sum at retirement, the stock investments would produce a “pot of gold” several times greater in magnitude than SS.

However, we still don’t have a fair comparison because workers choosing a stock plan would essentially engage in a kind of dollar-cost averaging over 40 years, meaning that investments would be made in relatively small amounts over time, rather than investing a lump-sum at the beginning. This helps to smooth returns because purchases are made throughout the range of market prices over time, but it also means that returns tend to be lower than the 40-year rolling returns shown above. That’s because the average contribution is invested for only half the time.

To be very conservative, if we assume that real stock returns average between 5% and 6% annually, $1 invested every year would grow to between $131 – $155 after 40 years in constant dollars. At returns of 1% to 2% from SS, which I believe are typical of the IRRs for many medium earners, the cumulative “pot” would grow to $49 – $60. Assuming that the tax treatment of the stock plan was the same as contributions and benefits under SS, the stock plan almost triples your money.

Dealing With the Transition

Privatization covers a range of possible alternatives, all of which would require federal borrowing to pay transition costs. Unfortunately, the Achilles heel in all this is that now is a bad time to propose more federal borrowing, even if it has clear long-term benefits to future retirees.

Todd Henderson in the Wall Street Journal suggests a seeding of capital provided by government at birth along with an insurance program to smooth returns. Another idea is to offer an inducement to delay retirement claims by allowing at least a portion of future benefits to be taken as a lump sum. If retirees can privately invest at a more advantageous return, they might be willing to accept a substantial discount on the actuarial value of their benefits.

In fact, there is evidence that a majority of participants seem to prefer distributions of lump sums because they don’t value their future benefits at anything like that suggested by the SSA analysis. In fact, many participants would defer retirement by 1 – 2 years given a lump sum payment. Discounts and/or delayed claims would reduce the ultimate funding shortfall, but it would require substantial federal borrowing up front.

Additional federal borrowing would also be required under a private option for investing one’s own contributions for future dispersal. The impact of this change on the system’s long-term imbalances would depend on the share of earners willing to opt-out of the traditional SS program in whole or in part. More opt-outs would mean a smaller long-term obligations for the traditional system, but it would be hampered by a costly transition over a number of years. Starting from today’s PAYGO system, someone still has to pay the benefits of current retirees. This would almost certainly mean federal borrowing. Spreading the transition over a lengthy period of time would reduce the impact on credit markets, but the borrowing would still be substantial.

For example, perhaps earners under 35 years of age could begin opting out of a portion or all of the traditional program at their discretion, investing contributions for their own future use. Thus, only a small portion of contributions would be diverted in the beginning, and amounts diverted would contribute to the nation’s available pool of saving, helping to keep borrowing costs in check. By the time these younger earners reach retirement age, nearly all of today’s retirees will have passed on. Ultimately, the average retiree will benefit from higher returns than under the traditional program, but since they won’t be (fully) paying the benefits of current or near-term retirees, the public must come to grips with the bad promises of the past and fund those obligations in some other way: reduced benefits, taxes, or borrowing.

Another objection to privatization is financial risk, particularly for lower-income beneficiaries. Limiting opt-outs to younger earners with adequate time for growth would mitigate this risk, along with a reversion to the traditional program after age 45, for example. Some have proposed limiting opt-outs to higher earners. Bear in mind, however, that the financial risk of private accounts should be weighed against the political and demographic risk already inherent in the existing system.

One more possibility for bridging the transition to private, individually-controlled accounts is to sell federal assets. I have discussed this before in the context of funding a universal basic income (which I oppose). The proceeds of such sales could be used to pay the benefits of current and near-term retirees so as to allow the opt-out for younger workers. Or it could be used to pay off federal debt accumulated in the process. The asset sales would have to proceed at a careful and deliberate pace, perhaps stretching over several decades, but those sales could include everything from the huge number of unoccupied federal buildings to vast tracts of public lands in the west, student loans, oil and gas reserves, and airports and infrastructure such as interstate highways and bridges. Of course, these assets would be more productive in private hands anyway.

The Likely Outcome

Will any such privatization plan ever see the light of day? Probably not, and it’s hard to guess when anything will be done in Washington to address the insolvency we already face. Instead, we’ll see some combination of higher payroll taxes, higher payroll taxes on high earners through graduated payroll tax rates or by lifting the earnings cap, reduced benefits on further retirees, limits on COLAs to low career earners, and means-tested benefits. Some have mentioned funding Social Security shortfalls with income taxes. All of these proposals, with the exception of automatic benefit cuts in 2035, would require acts of Congress.

Biden’s Rx Price Controls: Cheap Politics Over Cures

08 Tuesday Nov 2022

Posted by Nuetzel in Prescription Drugs, Price Controls, Uncategorized

≈ 1 Comment

Tags

Big Pharma, Charles Hooper, CMS, David Henderson, Drug Innovation, Drug R&D, FDA Approval Process, Inflation Reduction Act, Innovation, Insulin Costs, Joe Biden, Joe Grogan, Medicare, Medicare Part B, Medicare Part D, Opioids, Over-prescription, Patent Extensions, Prescription Drug Costs, Price Controls, Price Gouging, Pricing Transparency, Shortages, third-party payments

You can expect dysfunction when government intervenes in markets, and health care markets are no exception. The result is typically over-regulation, increased industry concentration, lower-quality care, longer waits, and higher costs to patients and taxpayers. The pharmaceutical industry is one of several tempting punching bags for ambitious politicians eager to “do something” in the health care arena. These firms, however, have produced many wonderful advances over the years, incurring huge research, development, and regulatory costs in the process. Reasonable attempts to recoup those costs often means conspicuously high prices, which puts a target on their backs for the likes of those willing to characterize return of capital and profit as ill-gotten.

Biden Flunks Econ … Again

Lately, under political pressure brought on by escalating inflation, Joe Biden has been talking up efforts to control the prices of prescription drugs for Medicare beneficiaries. Anyone with a modicum of knowledge about markets should understand that price controls are a fool’s errand. Price controls don’t make good policy unless the goal is to create shortages.

The preposterously-named Inflation Reduction Act is an example of this sad political dynamic. Reducing inflation is something the Act won’t do! Here is Wikipedia’s summary of the prescription drug provisions, which is probably adequate for now:

“Prescription drug price reform to lower prices, including Medicare negotiation of drug prices for certain drugs (starting at 10 by 2026, more than 20 by 2029) and rebates from drug makers who price gouge… .”

“The law contains provisions that cap insulin costs at $35/month and will cap out-of-pocket drug costs at $2,000 for people on Medicare, among other provisions.”

Unpacking the Blather

“Price gouging”, of course, is a well-worn term of art among anti-market propagandists. In this case it’s meaning appears to be any form of non-compliance, including those for which fees and rebates are anticipated.

The insulin provision is responsive to a long-standing and misleading allegation that insulin is unavailable at reasonable prices. In fact, insulin is already available at zero cost as durable medical equipment under Medicare Part B for diabetics who use insulin pumps. Some types and brands of insulin are available at zero cost for uninsured individuals. A simple internet search on insulin under Medicare yields several sources of cheap insulin. GoodRx also offers brands at certain pharmacies at reasonable costs.

As for the cap on out-of-pocket spending under Part D, limiting the patient’s payment responsibility is a bad way to bring price discipline to the market. Excessive third-party shares of medical payments have long been implicated in escalating health care costs. That reality has eluded advocates of government health care, or perhaps they simply prefer escalating costs in the form of health care tax burdens.

Negotiated Theft

The Act’s adoption of the term “negotiation” is a huge abuse of that word’s meaning. David R. Henderson and Charles Hooper offer the following clarification about what will really happen when the government sits down with the pharmaceutical companies to discuss prices:

“Where CMS is concerned, ‘negotiations’ is a ‘Godfather’-esque euphemism. If a drug company doesn’t accept the CMS price, it will be taxed up to 95% on its Medicare sales revenue for that drug. This penalty is so severe, Eli Lilly CEO David Ricks reports that his company treats the prospect of negotiations as a potential loss of patent protection for some products.”

The first list of drugs for which prices will be “negotiated” by CMS won’t take effect until 2026. However, in the meantime, drug companies will be prohibited from increasing the price of any drug sold to Medicare beneficiaries by more than the rate of inflation. Price control is the correct name for these policies.

Death and Cost Control

Henderson and Hooper chose a title for their article that is difficult for the White House and legislators to comprehend: “Expensive Prescription Drugs Are a Bargain“. The authors first note that 9 out of 10 prescription drugs sold in the U.S. are generics. But then it’s easy to condemn high price tags for a few newer drugs that are invaluable to those whose lives they extend, and those numbers aren’t trivial.

Despite the protestations of certain advocates of price controls and the CBO’s guesswork on the matter, the price controls will stifle the development of new drugs and ultimately cause unnecessary suffering and lost life-years for patients. This reality is made all too clear by Joe Grogan in the Wall Street Journal in “The Inflation Reduction Act Is Already Killing Potential Cures” (probably gated). Grogan cites the cancellation of drugs under development or testing by three different companies: one for an eye disease, another for certain blood cancers, and one for gastric cancer. These cancellations won’t be the last.

Big Pharma Critiques

The pharmaceutical industry certainly has other grounds for criticism. Some of it has to do with government extensions of patent protection, which prolong guaranteed monopolies beyond points that may exceed what’s necessary to compensate for the high risk inherent in original investments in R&D. It can also be argued, however, that the FDA approval process increases drug development costs unreasonably, and it sometimes prevents or delays good drugs from coming to market. See here for some findings on the FDA’s excessive conservatism, limiting choice in dire cases for which patients are more than willing to risk complications. Pricing transparency has been another area of criticism. The refusal to release detailed data on the testing of Covid vaccines represents a serious breach of transparency, given what many consider to have been inadequate testing. Big pharma has also been condemned for the opioid crisis, but restrictions on opioid prescriptions were never a logical response to opioid abuse. (Also see here, including some good news from the Supreme Court on a more narrow definition of “over-prescribing”.)

Bad policy is often borne of short-term political objectives and a neglect of foreseeable long-term consequences. It’s also frequently driven by a failure to understand the fundamental role of profit incentives in driving innovation and productivity. This is a manifestation of the short-term focus afflicting many politicians and members of the public, which is magnified by the desire to demonize a sector of the economy that has brought undeniable benefits to the public over many years. The price controls in Biden’s Inflation Reduction Act are a sure way to short-circuit those benefits. Those interventions effectively destroy other incentives for innovation created by legislation over several decades, as Joe Grogan describes in his piece. If you dislike pharma pricing, look to reform of patenting and the FDA approval process. Those are far better approaches.

Conclusion

Note: The image above was created by “Alexa” for this Washington Times piece from 2019.

Sacred Cow Chips

Tag Archives: Medicare

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Biden’s Rx Price Controls: Cheap Politics Over Cures