Friday, August 27, 2004

Professor Krugman Flunks Economics

Paul Krugman, NYT columnist and ersatz professor of economics and international affairs at Princeton University, writes today about "America's Failing Health". Herewith, some excerpts and commentary by yours truly:
Working Americans have two great concerns: the growing difficulty of getting health insurance, and the continuing difficulty they have in finding jobs. These concerns may have a common cause: soaring insurance premiums. [Let's see how he pulls this one off.]

In most advanced countries, the government provides everyone with health insurance. [The "government" means taxpayers, of course. I love the way these well-educated left-wing economists ignore the truth when it suits them. Of course, we know he's about to slam the U.S. for not being as "advanced" (i.e., socialistic) as other Western democracies. And sure enough...] In America, however, the government offers insurance only if you're elderly (Medicare) or poor (Medicaid). Otherwise, you're expected to get private health insurance, usually through your job....

Some employers have dropped their health plans. Others have maintained benefits for current workers, but are finding ways to avoid paying benefits to new hires - for example, by using temporary workers. And some businesses, while continuing to provide health benefits, are refusing to hire more workers. [Written in a tone that suggests there's a social law that says businesses must "pay for" health insurance, and that they must hire workers they can't afford.]

In other words, rising health care costs aren't just causing a rapid rise in the ranks of the uninsured (confirmed by yesterday's Census Bureau report); they're also, because of their link to employment, a major reason why this economic recovery has generated fewer jobs than any previous economic expansion. [Wait a minute, prof, when employers don't subsidize health insurance premiums, they're able to hire more employees and/or pay current employees more. Businesses simply do employees a favor by creating group plans, which pool risks and therefore yield lower premiums than individual policies. In the alternative, employers would offer higher salaries and let employees fend for themselves.]

Clearly, health care reform is an urgent social and economic issue. But who has the right answer? [The market has the right answer. So what you're about to say is irrelevant, but let's plough on, anyway.]

The 2004 Economic Report of the President told us what George Bush's economists think, though we're unlikely to hear anything as blunt at next week's convention. According to the report, health costs are too high because people have too much insurance and purchase too much medical care. [True, that's exactly right, it's called "moral hazard" -- a concept that Prof. Krugman seems not to know or care about. But there's more to it than that, as I'll explain at the end.] What we need, then, are policies, like tax-advantaged health savings accounts tied to plans with high deductibles, that induce people to pay more of their medical expenses out of pocket. (Cynics would say that this is just a rationale for yet another tax shelter for the wealthy, but the economists who wrote the report are probably sincere.) [Well, I'm sure that the economists who wrote the report appreciate your insincere endorsement of their sincerity -- as if they care. Though how tax-advantaged health savings accounts are a tax shelter for "the wealthy" (those filthy people who earn a living) is beyond me.]

John Kerry's economic advisers have a very different analysis: they believe that health costs are too high because private insurance companies have excessive overhead, mainly because they are trying to avoid covering high-risk patients. [If that's true -- and it's not, Bush's economists are right -- the answer is to induce more competition in the health insurance business, which I'll come to.] What we need, according to this view, is for the government to assume more of the risk, for example by picking up catastrophic health costs, thereby reducing the incentive for socially wasteful spending, and making employment-based insurance easier to get. [In other words, "government" (i.e., taxpayers) would foot the bill. But because taxpayers wouldn't foot the bill directly, they'd be inclined to undergo unnecessary medical treatments (it doesn't take much these days to get into the "catastrophic" range) Then we'd be right back where we were, except that medical costs would be even higher.]

A smart economist can come up with theoretical justifications for either argument. The evidence suggests, however, that the Kerry position is much closer to the truth. [Only the kind of evidence Krugman would believe.]

The fact is that the mainly private U.S. health care system spends far more than the mainly public health care systems of other advanced countries, but gets worse results. In 2001, we spent $4,887 on health care per capita, compared with $2,792 in Canada and $2,561 in France. Yet the U.S. does worse than either country by any measure of health care success you care to name - life expectancy, infant mortality, whatever....[The relevant measure is the effectiveness of particular treatments -- things like life expectancy, infant mortality, and whatever are explained by demographic factors, dietary habits, and "whatever". With respect to the effectiveness of particular treatments, guess what? The U.S. leads them all. Read about it here.]

And the U.S. system does have very high overhead: private insurers and H.M.O.'s spend much more on administrative expenses, as opposed to actual medical treatment, than public agencies at home or abroad. [So what? Results count, not phony cost comparisons. Public agencies get a free ride on a lot of their administrative expenses. And you may have noticed that health care delivered by public agencies is distinctly second-rate.]

Does this mean that the American way is wrong, and that we should switch to a Canadian-style single-payer system? [Ah yes, the famous Canadian system that has Canadians flocking to the U.S. for treatment.] Well, yes. Put it this way: in Canada, respectable business executives are ardent defenders of "socialized medicine." [That's because they prefer not to compete for employees by offering health-care plans, so they let the taxpayers foot the bill.] Two years ago the Conference Board of Canada - a who's who of the nation's corporate elite - issued a report urging fellow Canadians to bear in mind not just the "symbolic value" of universal health care, but its "economic contribution to the competitiveness of Canadian businesses." [Right, Canadian taxpayers pay to make Canadian businesses more competitive. And Krugman thinks U.S. businesses are rapacious.]
That's enough of that. Now, let's talk about why the cost of health care is rising in the U.S. and what to do about it. The cost of health care is rising in part because demand is rising, mainly because of rising incomes, access to employer-subsidized insurance, and rising numbers of Medicare beneficiaries. The supply of health care isn't rising as fast because of government regulation (e.g., medical licensing and FDA approval of drugs), which is endorsed by those who are being regulated. Then, there is regulation of the insurance industry, which inhibits entry and competition among insurers. (Insurers, by the way, are able to negotiate with health-care providers and drug companies to get lower prices for their insureds, a fact that Krugman chooses to overlook in his effort to paint insurance companies as evil entities.) Deregulation -- or less stringent regulation -- is part of the solution. (I've written before that this is not a high-risk solution. See here, here, and here.)

The rest of the solution is to keep government out of the act. The market -- especially a less-regulated market -- will provide health insurance that's tailored to consumers' needs. As employers scale back or drop their insurance plans, employees will seek insurance elsewhere. A competitive market will provide it. A competitive market will even offer insurance for the hard-to-insure, either through tailored policies or ad-hoc groups of hard-to-insure consumers -- groups that insurance companies will compete to create.

But all of that seems to be beyond the comprehension of Paul Krugman, ersatz economist and strident socialist.