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Archive for July, 2013

On Helping the Poor

July 10, 2013 1 comment

Readers of this blog know that I have had nothing positive to say about Obamacare. In fact, I regard this law to be one of the truly dreadful laws that I have seen passed in my professional lifetime. As I said in an earlier post, this law should be instructive about the folly of central planning (see that post here) but there is another aspect of the law that reveals a larger truth. Laws designed to help the poor often damage the very people the laws are designed to help. The minimum wage is the classic example of a law which harms people at the low end of the income distribution even though it is designed to raise their incomes.

There is a large body of evidence showing that minimum wages create unemployment. Yes there are some people who have their incomes raised by the minimum wage but others lose their jobs (or have their hours cut) when the minimum wage is increased. Any student of introductory economics sees this illustrated in a simple labor market diagram. Why is it good policy to pass a law which creates two classes of people: the winners and the losers?

Obamacare is designed to provide medical insurance to individuals at the low end of the income distribution and some will certainly gain coverage under the law. But others may lose their jobs because of the employer mandate, or have their hours cut (there is growing evidence of more part-time workers in the economy), and still others may lose their medical coverage. Was it really necessary to create winners and losers once again? How about using insurance vouchers to give coverage to the poor. We already do things much like this with the food stamp program so the government knows how to administer such a program. And yet we would not need to damage others with new taxes, mandates, and transaction costs.

As it is sometimes said, the road to hell is paved with good intentions. Obamacare is yet another example of what liberals regularly do because of their economic illiteracy. Their good intentions damage the very people that they want to help.

 

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Interest Rates and the Government Deficit

News reports on the federal government‘s deficit have informed the public that the deficit has declined (go to the Treasury’s Financial Management Service for the actual numbers). There are two issues that the public should bear in mind when thinking about these press reports.

One is that a major fundamental driver of the deficit is the demographic change in the country, specifically the aging  and retirement of the baby boomers. That process continues and so the deficit will continue to grow as more of the boomers retire. The deficit’s decline is only temporary and due to the tax increases imposed by Obamacare among other reasons.

Second, it has also been reported that U.S. interest rates have increased although they are still below historic levels. Short-term interest rates, meaning the interest rates on borrowing by the government over short time periods such as six months, tend to have lower interest rates than borrowing done over longer time periods. So when the government borrows short term, it makes lower interest payments to bond holders and thus reduces the deficit from what it would otherwise be if borrowing were done longer term. However, the risk to the government is that if interest rates go up, then when the short-term bonds mature and must be paid off, the government will need to issue new short-term bonds paying the new higher interest rates so the government’s deficit will rise. If the government borrowed longer term, it would not need to issue new bonds at the higher rates and so the deficit would not increase, at least for a time, until the long-term bonds mature and must be paid off. So this scenario tells us that the decline in the deficit is temporary and will be reversed when the government borrows again.

The message to the public is clear; the deficit is still going to grow. The federal government’s fiscal crisis is still with us, no matter the temporary decline that has occurred.

Implementing Obamacare

July 4, 2013 1 comment

News reports of the delay in imposing the fines on firms for not providing health insurance got me to thinking about how educational Obamacare should be regarding the folly of central planning. The Soviet Union collapsed in large measure because central planning destroys the incentives for innovation, efficiency, and wealth creation and yet there are many people in this country who continue to think that it is the government’s role to intervene in markets to dictate what gets sold and at what price. Consider just a few of the problems already revealed about the implementation of Obamacare.

What would make anyone think the the government has the expertise to carry out a sophisticated IT project which is what is involved in creating the exchanges for buying insurance? The government has a history of failed IT projects and a consultant to the government has commented in the press that creating such an infrastructure usually requires much more time than the government has to get the exchanges up and running. And so there is now a GAO report delicately suggesting that there is a considerable chance that the exchanges will not be available October 1. Why do we need these anyway? Life insurance gets sold without the need for government-run exchanges. Are there problems in the life insurance marketplace because there are no exchanges run by the government for the purchase of life insurance? I am not aware of any.

The insurance pricing is now becoming available (see this WSJ article) and, although the cheapest policy will now cover more than cheap policies currently available, the insurance could be two or three times more expensive than it is now for young people. Does anyone seriously think that a person of modest means, say earning a pre-tax income of $35,000, is going to spend a third of his/her income on health insurance? The only way they pick it up is if the cost is paid to a large extent by the taxpayers and it appears that the subsidies disappear at this income level.

There are reports that some health insurance systems and insurance companies will not participate in the exchanges. As for the insurance companies, I have written previously (see this post) about the risks of adverse selection which could bankrupt insurance companies so it is quite reasonable for insurance firms to wait to see what buyers do before entering the exchanges. With some health systems refusing to participate, there is the possibility of few physician choices for those buying insurance in the exchanges. Thus it appears possible that the billions of dollars spent to create the exchanges will result in exchanges with very little activity since they provide low quality products.

Finally, by delaying the fines, the Administration seems to think that this will prevent firms from cutting hours and/or employment (there are already reports of reduced employment and hours in the media) but this only postpones the inevitable. Further, as Calvin Coolidge so clearly stated, firms act in anticipation of tax increases (see my post on Coolidge here) so it is doubtful the the delay will make much difference. It is hard to see this delay as anything other than a political ploy aimed at the 2014 elections but, if so, it will have little effect.

The Affordable Care Act is an exercise in central planning and the Law of Unintended Consequences seems to be arising yet again. Will the supporters of central planning finally figure out that central planning is a failed idea that can ultimately destroy the economy in which it is used?

Economics One

A blog by John B. Taylor

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