Tuesday, October 23, 2007

Doesn't Money Fix Everything?

Over the last few months, I have explained some problems with our current health care set up. My chief complaint about the plans that Hillary, Obama, and Edwards have put up is that they fail to address the bad incentives HMO and PPO style insurance creates. Even though I supported Bush’s veto of S-Chip, I knew that he and other free-market supporters would get bad press. When it boils down to a moral argument, it is hard to win against “Helping the Children” by complaining about cost over runs. Having said that, something remarkable struck me over the weekend that dramatically changed my thinking on Universal Health Care.

It Will NOT Work. We will be no healthier with Universal Health Care than without it. In fact, I think there are reasons to believe that our health will be worse under Universal Health Care.

The reason? Moral Hazard. Moral Hazard, is an insurance term, and happens when one party is insulated from risk and therefore behaves more risky than before they were insured. It can pop up in many forms. A person with a large life insurance policy might be more likely to commit suicide because family members won’t suffer financially. A company with fire insurance may choose to spend less time on fire prevention. Sometimes Moral Hazard is a conscious choice, but many times our behavior changes without even thinking about it. We feel safe, so we act a little more recklessly.

The following is from Tim Harford, a member of the Financial Times editorial board, in his column The Undercover Economist. This effect described by Mr. Harford is known as the “Peltzman Effect”. It is akin to Moral Hazard in the insurance world.

“The idea that seatbelts cause accidents is so ridiculous it could only have come from an economist. That economist is Sam Peltzman, who in 1975 published a paper demonstrating that drivers did indeed drive more dangerously after mandatory seatbelt laws were passed in the US. He argued that despite technological evidence showing that seatbelts save lives in a given accident, there was no evidence that the seatbelt laws had reduced driver fatalities. In other words, drivers take advantage of seatbelts to drive more dangerously rather than to live longer. More compellingly, Peltzman detected a rise in pedestrian and cyclist fatalities when seatbelt laws were passed.”

One might think it is a stretch to compare a seatbelt law with health care coverage. So let’s compare the outcome of a much larger government run insurance program. Welfare can be considered poverty insurance. It pays out money in the event that someone slips into poverty. I have argued before that Welfare distorted behaviors in many negative ways, but how well did it actually reduce poverty?

In 1959, the poverty rate in the U.S. was measured at around 23%. The “War on Poverty” passed under Lyndon Johnson in August of 1964, going into effect in 1965. In 1965, the poverty rate was about 16%, meaning that before welfare became a nationwide program the poverty rate had fallen by 7 percentage points in 6 years. While the poverty rate fell to an all time low of 11% in 1973, by 1983 the poverty rate increased up to 15%, wiping out previous gains. It dipped afterwards, but again rose to 15% in 1993.

If welfare had much of a positive benefit, it is hard to tell. Maybe it worked for a few years, but if it did work, shouldn’t the poverty rate start to climb in 1995 after Bill Clinton and the Republican Congress reformed welfare and the number of recipients declined by over 50%? In 1995, the poverty rate was about 14%, declining to around 11.5% in 2000. Today, it is at 12.6%. Poverty rates improved after we radically cut back Welfare benefits.

The answer is then clear. If the poverty rate failed to decline permanently after Welfare passed in 1965, and getting rid of the program led to lower poverty rates the program never worked. If the poverty rate was declining rapidly before Welfare was passed, and then came to a halt afterwards, the conclusion can be drawn that not only did it not work, it made things worse. The power of Moral Hazard outweighed the no-strings-attached checks we handed to the poor.

How does Moral Hazard affect health insurance? In three ways: First, as I’ve talked about before, we tend to use more health services than we need under an HMO or PPO style plan. Second, we have less personal incentive to shop for the least expensive doctor, hospital, medicine, or service provider because the insurance dramatically reduces our out of pocket costs. Third, those with generous insurance are likely to feel safer and act more reckless with their health.

Some may scoff at the third one, but let me relate a story to you of a gentleman I met a couple years ago. He was in his early 30’s, college educated, with a professional job (and generous health insurance). He happened to order a big chicken fried steak so we started talking about heartburn. He related to me that he was on name brand high blood pressure medicine, heartburn medicine, and cholesterol medicine. He said, “It’s great! Now I can eat whatever I want and not have to worry about it.” Do you really think he would have the same reckless attitude if he had to pay full price out of pocket for all of those medicines? Not a chance.

Universal Health Care, under the schemes that our Democratic candidates for President are proposing will not just cost too much, they will not improve our health. If mandatory seat belts don’t save lives, if Welfare didn’t cure poverty, universal health care will not make us healthier.

As always, let me know what you think.

Monday, October 15, 2007

Updates on Fair Tax, Immigration, and Health Care

Mea Culpas -

Occasionally I make a mistake or overlook something I’ve written about. Usually, it’s one of you that points it out to me via e-mail.

On Sept 13, I wrote about the Fair Tax in “A Tax Cure All?” :

“A glaring problem is crossing borders to buy big-ticket items in Canada and Mexico…to purchase a car, boat, jewelry...Only a fool would buy any big-ticket item inside the U.S.”

John C. and Ian wrote in to let me know that buying a car in Mexico would be easy to check once you filed the paperwork for registration and license plates here in the U.S. I do still think jewelry would be easy to avoid a national sales tax. It would be hard to prove where you bought it without a massive effort. But, I do feel pretty dumb not thinking that cars have to be registered, titled, and insured.

Also on the Fair Tax I described how the theoretical ABC Services Inc. would be hurt because they would have to pay taxes on all revenue and not just on their thin profit margins. Ian pointed out that if the income tax was replaced, the tax accounting costs and human resources costs for the company would fall substantially. If you don’t pay corporate taxes you don’t really need that extra accountant. If you don’t have to fill out a whole bunch of IRS forms for W2, Social Security, Medicare…you might not need that extra HR staff member. I don’t know if this completely makes up for the extra taxes that are calculated on all revenues, but it shrinks the margin and muddies my argument.

Last week, I wrote about using remittances and work visas as leverage for opening markets in Mexico and Central America. After getting no e-mails for a few days, I felt a little like Ben Stein up at the chalkboard talking about the Smoot-Hawley trade act, “Anyone, anyone?” However, Alex G. who does work for the U.S. State Department sent this lone reply:

“Well I think you are on the right track with *some* of your comments about leveraging the money transfer issue. Your end goal…I think is too small in scope.”

“Our issuance of visas has to be looked at globally, and used as a diplomatic tool with those countries for whom we have the greatest desire to strengthen relationships. If you increase the number of visas to Mexico, India, China and others are going to (rightfully) cry foul.”

Updates –

In an article printed today at CNN.com, a study reveals that even though basic dental coverage is guaranteed by Britain’s National Health Service many British residents have resorted to pulling their own teeth. They cannot find an available government subsidized dentist and cannot afford the more expensive private dentists.

“One respondent in Lancashire, northern England, claimed to have extracted 14 of their own teeth with a pair of pliers.”

Sounds like a great system! Let’s hear it for Government run health care and insurance! Woohoo!

Pass along –

If you are consistently annoyed by many of your local paper’s columnists, like I am, and would like to send a “Letter to the Editor” here are some of their helpful tips from a posting at eHow.com:

Step Five

State your opinion right off the bat in the first line: "I am writing to say ..."

Step Six
Clarify your context. For example, "In response to yesterday's headline, let me say ..." or "In printing John Smith's diatribe against big dogs, you've lost this small reader's subscription ..."

Step Seven
Trim your letter. Column inches are precious, and the newspaper will edit the letter if you don't.

Step Eight
Keep insults, name-calling and hearsay out of the contents if you want your letter published.

Step Nine
Proofread carefully, then hand your missive to someone else to proofread a second time.

Wednesday, October 10, 2007

What have you done for me lately?

A week ago Saturday I attended a speech by Laura Ingraham, a conservative radio host, at my father’s invitation. I enjoyed the event, but was surprised at the emotional intensity the crowd exhibited towards illegal immigration. I do not feel so passionately about the subject. Given that surprise, I gave the subject some thought and decided to talk about it this week.

I support immigration. It lowers prices for Americans and lifts immigrants out of grinding poverty in their home countries. If we only allowed in the educated and the well-to-do, I’m not sure my ancestors would have made it here. On the other hand, because we have opened our health care, welfare and school systems to illegal immigrants there is an imbalance in the benefits from our current situation.

Who is benefiting the most and paying the least? Illegals pay sales tax and property tax (indirectly through their rent). If they are using phony documents, they still have income tax withholding and Social Security and Medicare taxes. But, because they typically live in small and modest homes, have no health insurance, low and often unreported incomes, American citizens are carrying the bigger load, and not reaping the full benefit. While the anger is directed at illegals, they are not the ones contributing the least.

Those who are benefiting the most and contributing the least are foreign relatives of illegal immigrants and their governments. Illegal immigrants send back billions of dollars to family members in their native countries. The foreign relatives pay nothing in taxes to us.

According to the Federal Reserve, remittances to Mexico in 2006 totaled $23.1 Billion, having increased annually at a rate of 20% since 2000. This is 2.7% of the national economy, and in some Mexican states, such as Michoacan, these cash flows reach 16.1% of their entire state income. According to Inter-American Development Bank, remittances totaled $9.25B during 2006 to El Salvador, Honduras, and Guatemala, which are much smaller countries. In Nicaragua, remittances may be 29% of their entire economy.

Obviously, these areas are dependent on cash from their immigrant workers in the U.S. The knee jerk reaction would be to cut off the cash, but a little more thought reveals that this can be leverage for more valuable goals.

Mexico has been a major oil producer for many decades, but their output has fallen rapidly over the last 10-15 years. Baker and Associates, an Energy Policy consulting firm, discusses in Rethinking Oil Policy in Mexico a number of problems in Mexico’s energy sector. Pemex is a government run monopoly and provides big revenues for the government in Mexico. Their oil production is declining because a lack of reinvestment in oil field exploration, while the government siphons off revenues for budget purposes. Their refinery capacity is so small that even though they export billions of barrels of oil they import gasoline because they lack the technology to expand to meet demand. The same is true for their natural gas industry. The main cause is that American companies, with their newer technologies, are restricted from investing in Mexico’s energy industry.

A threat of crackdown on illegal immigration and remittances could convince Mexico to open its energy industry to American investment. This investment could mean thousands of engineering, construction, and contract employment for Americans to work on projects in Mexico. Expanding oil output in Mexico also secures a safer source of energy for the U.S. outside of the Middle East. Other Central American countries also have a number of restrictions on American investment in their countries and public policies that hinder internal economic growth. Stricter immigration enforcement would help convince these countries to make needed changes.

As countries comply, we would offer large numbers of temporary work visas for sale to their citizens. The greater the compliance, the greater the number of work visas. Part of the price of the work visa should go to a fund to give cash rewards to legal foreign workers who give information that leads to deportations. If we are not serious about stopping illegal immigration, this leverage will be seen as a bluff.

The true source of illegal immigration is poverty in Central America. While many of their economies are beginning to grow more quickly, their failure to adopt more open markets is preventing the kind of growth it takes to lift their citizens out of poverty and into the middle class. This leaves big incentives to come to the United States illegally. Can we really expect a rural farmer from Guatemala making $800 a year to lose interest in coming to U.S. where he can make over $20K a year?

While “Just build the wall!” gets a cheer from the crowd the long-term solution is signing these agreements between the United States, Mexico and the rest of Central America. The benefits from immigration should not be a one-way street. We have to demand that these countries open up their markets to our American companies and American workers. We have to push these countries to pass free market reforms to lift their citizens out of poverty and thus decrease the demand for immigration to the United States. Illegal immigration must be curtailed to give our government the leverage to convince these countries to make these changes.

As always, tell me what you think.