US healthcare

So now that the US healthcare debate has resulted in a bill being passed, and hopefully the rhetoric subsides, I wanted to take a broad look at what this bill is really all about.  What I will contend is that this bill extends healthcare to nearly all Americans, and it levels the playing field between those with and those without insurance in terms of costs.

Any Canadian or British (or European) person will tell you that they look on in horror when they see the high prices that Americans are forced to pay for healthcare and are thankful that they don't have to endure those types of expenses.  On the other hand of course, the US has some of the lowest tax rates on income in the world ( - despite what most Americans think) and instituting a single payer tax system would definitely cause those taxes to rise.  But given that healthcare is probably the most important thing in our lives, there are many who think this is the "first best" alternative.  What I think most Americans fail to realize is that in Canada and Britain (and elsewhere), the government doesn't take over healthcare - it basically takes over the insurance roll in the system.  British doctors set up privately in practices, and although their rates are set by the government, they can see patients privately if they wish, and indeed there is a thriving private medical insurance scheme in the UK as an alternative to the National Health System (NHS). 

So what was passed last week?  In my opinion it was a bill that extends private health insurance to nearly every American and therefore lowers the cost of healthcare for us, the population.  It is a "second best" option, but it is better than what we had, and for good reason.  How?  Well as one of my friends recently told me: "I was in hospital for 4 days and the bill came to $28,000.  Once I had handed over the bill to my insurance company, they negotiated it down to under $7,000.  I ended up paying my deductible of $200".  Now for that particular incident , look at the potential costs: if she had been an uninsured patient she would have been on the hook for $28,000; but as she was insured she ended up paying $200 - more than 100 times smaller bill for the hospital stay.  Although noone is refused treatment in a public emergency room, those people who do not qualify for medicare or medicaid can quickly face bankrupcy if they don't have insurance, and sometimes even if they do have health insurance.  Hopefully the bill will fix some of the limitations on insurance and more tightly regulate coverage. 

So what didn't the healthcare bill do?  Several things:

First, for any American who has been to a doctor in Britain or in Europe, what is most surprising is that when you walk into the doctor's office, there is much less of a front office.  There is no triage, and rather shockingly, the doctor usually walks to the waiting area to meet you after calling your name.  So the doctor's offices in Canada and Europe tend to be much more efficient - but why is this so?  It's partially due to the fact that medical lawsuits in the US have frightened doctors into checking for everything.  This bill changed nothing in this arena - and yet there is still a lot of saving to be made by curtailing lawsuits and this would mean much less costs in what is now an obviously bloated system.

Second, it didn't curtail the health insurance industry, and if anything it gave them more business.  Next time around I think we should either get rid of the healthcare insurance companies and have a single payer system or heavily regulate them like we do banks. 

Third, it didn't cover all small businesses.  I really don't understand why small businesses with less than 15 employees are exempt - their employees should be covered in my opinion, and some kind of voluntary pools should have been set up to ensure that every American can get reasonably priced health insurance.  These are the people that will still be left out, so we are not going to stop hearing horror stories about people having trouble paying their healthcare bills and facing bankrupcy, but hopefully we'll hear them much less!

Dallas Fed The Euro and Dollar in the Crisis and Beyond - March 17, 2010.

I attended a two day euro/dollar event over the last couple of days, with Wednesday's session a general policymaker day on the markets/government policies and the fallout from the financial crisis and the Thursday an academic workshop on European Integration. 

First, on the Wednesday there was a lot of interesting stuff but there were a few points missing from the debate.  See the agenda at http://www.dallasfed.org/institute/events/10euro.cfm

The President of the Federal Reserve Bank of Dallas, Richard Fisher, closed out the day by hitting the nail on the head, in my opinion, with his comments on the recent financial crisis.  He said ( - and here I'm paraphrasing - ) that these events occur with regularity and are just part of human behavior - and we probably will not be able to predict the next adverse event, and have to deal with it when it occurs.

I would go one step further though.  What most people missed at this conference was that this financial crisis was the result of the housing crisis, and has led to a recession, which is just part of the regular business cycle.  In other words although the Great Depression and the current downturn have serious social and political consequences, they are still essentially part of the regular downturns that we have in the macroeconomy known as the business cycle.  The business cycle is just a fact of macroeconomics and until we find a way to stop it occurring with such regularity, we need to just accepted it for what it is - a cycle!!

So why isn't the current downturn different from others as we are constantly being told that this is almost a depression (and has already been called "the great recession" by economic pundits)?  Because it resulted from a bubble in a market ( - the housing market), just like the Great Depression also resulted from a bubble in a market ( - the stockmarket).  What happened in both the Great Depression and the current recession is that both downturns spread to the financial sector, exposing a fault line or two, and causing a financial crisis which then spread to the rest of the economy.  The big difference though is that in the current recession the Fed and the Federal government have done the right thing - they have learned from the mistakes they made at the beginning of the Great Depression and have averted a major disaster.  The thing about most bubbles is that they i) usually don't spread to other sectors in the way they did this time through the financial sector and ii) they usually are not as deep as the current one as they exposed some major weaknesses in the financial services sector.

So shouldn't economists seek to stop what happened recently from happening again?  Most non-economics educated people would say "of course"!  I mean why would a doctor want a cold to reoccur again if they could stop if from happening?  But that's what recessions are - they are basically a mutating virus that hits the economy in different ways each time and can be particularly nasty if the body is physically run down.  But the economy isn't quite like a body - the recession also "cleans out" what economists call "malinvestment" - the bad investments that were done in the previous boom, so that the economy can begin to grow again in a healthier fashion.  Economists who think like this, by the way, are usually labelled "Austrians" after the group of economists who originated in Austria before the second world war. 

So when Adam Posen says "we all made mistakes with the financial services sector", I am not sure I agree.  Noone was going to change the regulatory structure in the US financial services sector without a crisis, so actually this gives the politicians a reason to act.  But the mistakes that were made were made by politicians years ago when they set up the patchwork regulatory framework that allowed "regulatory arbitrage" with also hardly any regulation for financial derivatives.

The big mistake we made, I believe, is not paying enough attention to what happened in Japan in the early 1990s.  Japan is still suffering from the mistakes that were made back then, and luckily we haven't fallen into the same traps as they did...but still it is not a pleasant experience for those people who have lost their jobs, and we are far from being out of the tunnel yet!!