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Archive for August, 2013

Health Care Competition

August 8, 2013 2 comments

Readers of this blog know that I recommend and regularly read John Cochrane’s blog The Grumpy Economist. I recently saw a post on this blog which was a real eye-opener. Want to know why we have a non-competitive health care system? Read on.

It seems there is a hospital in Oklahoma that posts prices for its services on the web (check out their prices here). Curiously, the hospital will not take Medicare insurance and the reason? If they take Medicare, they will not be able to post their prices on the web! I repeat, Medicare will not allow them to implement one of the standard practices that we observe in competitive markets. And so, to avoid regulation, the hospital does not accept Medicare or Medicaid. Also read this local news article about the hospital. Two other examples are suggestive about the lack of competition in health care.

In a community near my home, the Henry Ford Health System wanted to build a new hospital. In order to do this, they needed to win a court battle. The reason for the court case, as explained to me by a Ford physician, was that Ford’s competitors had to give their approval under Michigan law and they would not do so. Other states have restrictions on hospitals of this sort. So a firm cannot manage its capital stock in a profit-seeking way because of government interference. Does AMD need to give permission for Intel to build a new plant? Of course not and it is absurd to impose such restrictions.

Finally, ever wonder why we have not had a nation-wide market in health insurance? My guess is that we will find the government’s footprints on this fact as well.

Competition is one factor needed to bring down the cost of health care. But the central planners in government think they can do this through their administrative edicts. The Soviet Union had central planners who had similar thoughts. Look how well the Soviet Union turned out. It no longer exists.

Corporate Tax Reform

August 6, 2013 1 comment

There is now talk of tax reform in Washington. Both the personal and corporate tax codes are under discussion and the President has also signaled his interest in the reform of the corporate tax code. Here is a suggestion courtesy of, you guessed it, Milton Friedman (I will post a reference if I can find it). Eliminate it entirely and tax the income through the personal income tax code.

Corporations are treated for tax purposes as though they are taxable entities separate from households but this is clearly not the case. Corporations are assets owned by households (the stockholders) just as houses and bonds are assets owned by households. Except for firms, we do not have a separate tax code for stocks, bonds, and the other assets owned by households although there are tax differences based upon the source of our income. The income earned by a firm is owned by the stockholders but the stockholders allow the management to decide how much of it is retained or passed out to the owners as dividends. Taxing corporate income through the personal tax code does not end the taxation of corporate income. It does eliminate the transaction costs imposed on society of all the tax machinery in place to tax corporate income. So in this system, corporations determine taxable income and then apportion it to each unit of stock which gets reported on the personal returns of the stock owners. Think of the the resources that would be freed up in firms that could be devoted to wealth creation.

I sometimes think of the government as running a lawyer relief service since we continue to be burdened with more and more laws and regulations. Eliminating the tax code that exists for corporations would remove a big chunk of that burden. Isn’t it wonderful to think of all the accountants and lawyers that would be out looking for a job if this reform were carried out?

Categories: Fiscal Policy, Taxation

Congressional Gridlock

August 3, 2013 1 comment

It is regularly reported in the media that the public has a low opinion of Congress. One reason for this opinion is said to be the gridlock that prevents any action by Congress. My view about this gridlock is simply that it reflects the heterogeneity of the voters who, through the ballot process, effectively vote for this gridlock and so seem to want it. My reason for this opinion is as follows.

Voting is an example of what is known to economists as an agency problem. Principals (the voters) elect agents (politicians) to represent their interests in government activity. This is exactly what happens in a corporation where stockholders (the principals) allow the management (their agents) to manage their firm to maintain their interests. When we vote, we all vote for politicians whose views we largely support. So if there is gridlock in Congress, it is because there are fundamental disagreements among the voters about the proper functions of government. This is exactly why it is misguided to criticize the President for being unable to work with Congress. The presumption behind the view that Barack Obama should be working more closely with Congress is the belief that there is common ground between the President and his political opposition. I do not believe that there is much common ground at all. What compromise could be constructed to make a believer in capitalism sign off on Obamacare? There is none. Barack Obama is a far-left Democrat with nothing in common with many politicians who, among other things, believe in limited government. But is this gridlock really so bad? I think not.

My own belief is that most, but not all, of the problems in this country are created or made worse by government. I believe that the government typically is quite destructive. As an example, Obamacare has already driven firms out of the health insurance market and more are likely to follow. There are many other examples of this damage but just suppose that this is true. Then if the Congress can’t do much, at least they won’t be doing a great deal of damage to the country although there may be some good laws that don’t get passed. Gridlock may be viewed as a safety mechanism protecting us from the profound incompetence of the political class.

I remember reading a comment by the late Milton Friedman who wrote somewhere (I am paraphrasing here and sorry I don’t have a source but I know this to be true) that if you do find a legitimate problem with a market, the government “solution” to the problem will turn out to be far worse than the original problem that was found. I think he was dead right about this (and, as far as I can tell, he was mostly right about everything else he said or wrote) so I think that I am content to have gridlock.

The Detroit Bankruptcy

August 2, 2013 4 comments

By now, almost everyone knows about the Chapter 9 bankruptcy filing by the city of Detroit. There are some lessons from this sad story that are instructive and should be remembered during the next city or state bankruptcies which almost surely will occur.

The first lesson is the moral hazard that arises when the federal and state governments subsidize poorly managed cities. Moral hazard is the idea that insurance causes the insurance recipient to engage in more risky or reckless behavior. How did Detroit’s bankruptcy occur? In part, the answer is the state and federal subsidies that allowed the City Council and the Mayor to avoid dealing with the reality of Detroit’s deteriorating condition.

The city is now a dysfunctional mess (Detroit_Dysfunction is an article detailing what it is like to work in the Detroit trenches). It is easy to find media reports on conditions in the city but consider just this statistic. On average, if a person dials 911, there will be a police response in 58 minutes. It is not unfair to say that the city is essentially unlivable now that, to a large extent, the middle class has sensibly fled the city for safer environs. The city now has probably the smallest tax base of any major city in the country and it is hard to see how a city can exist without a tax base large enough to finance the legitimate activities of government.

The federal government at one time provided funds amounting to a third of the city’s payroll according to media reports. Couple this “insurance” with a City Council that is completely incompetent and unable to act in anything like a responsible way and you can easily see where the subsidies lead. There are now some calling for a city bailout by the federal government but can you imagine what Detroit or states like Illinois (another train wreck in the making) would do with access to the federal purse?

Another lesson from the Detroit bankruptcy is that it provides a lesson about the result of incompetent or corrupt local government. The City Council signed off on a Consent Agreement with the state prior to the appointment of Emergency Manager (EM) Kevin Orr. That agreement detailed steps to be taken by City Council and Mayor Dave Bing to try to address the city’s many problems. The City Council and Mayor failed to carry out the terms of the agreement and so the EM was appointed by Governor Rick Snyder. The last mayor of Detroit, Kwame Kilpatrick, is now in prison. When the voters consistently elect incompetent and/or corrupt politicians, bankruptcy is the end-game that results.

As I have told students in the classroom, bankruptcy serves a very desirable function in an economy as it provides the opportunity to fix a firm or government or dismantle the bankrupt entity. In the case of Detroit, bankruptcy is a way of solving problems that a corrupt or inept government could not or would not solve.

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