Health Care is Sick in America

American politicians are arguing about health care in another attempt to reform the broken system. America’s health-care system is by far the costliest in the world. Despite health care spending per person is almost double that of other rich countries, millions of Americans are without health insurance and quality of health care is not much better than elsewhere. Beyond the large numbers of uninsured, the problem is that it continues to grow at an unsustainable pace and is starting to have a huge impact on business and employment. The health care industry has been quite good at raising fears of rationing by more government intrusion in the health sector but the reality is that in America federal & state agencies (Medicare, medicaid, etc) already control a large portion of the market. The key to reform, regardless of political affiliation, is that the majority of Americans who have health insurance must come to terms with the fact that the current model of receiving any treatment covered by insurance without incurring some of the costs is a recipe of disaster for everyone. The problem with health care is  that market forces have been paralyzed by overregulation and until health care consumers can shop based on price, America will continue to get sicker and bogged down by its blindfolds in an ever more competitive global economy.

Protectionism: How to Bankrupt An Industry

The bankruptcy of Chrysler and especially General Motors (GM) represent a watershed moment in America’s history. These companies and the car industry had such an influence on America’s culture that they became protected by the U.S. government. Unfortunately by protecting its car industry America’s politicians hindered its ability to become efficient and innovative and thus made it vulnerable to nimbler foreign competitors. To be clear the industry’s collapse has nothing to do with the current financial crisis, but started in the 1970s when the car industry rather than compete with incoming Japanese products by making cheaper and better, they hid behind politicians. Rules on fuel economy distorted the market facilitating production of light trucks and SUVs while the government restricted the import of small, efficient Japanese cars. While managers and politicians failed on a grand scale, leveraging their political muscles, the unions contributed quite a bit to this failure fighting against innovation and demanding costly benefits that the industry could not afford. If Detroit had spent less time lobbying for protectionism and more time on improving its products it might have prospered. The great lesson from this failure is that even major industries can become vulnerable when protected from the pressures of competitions and politicians trying to protect them with trade restrictions will do them much more harm than good adding up to a major ripoff for both consumers and taxpayer.

A Stimulus to Bury our Kids in Debt

With the credit crisis crippling the global economy, governments are spending like drunken sailors to stabilize the financial system and spur growth once again using Keynesian policies. The United States especially has approved a giant fiscal stimulus, tax cuts and bail-outs that is increasing public debt. The crisis demand action but the problem is that (see IMF chart above) that government debt of rich countries is set to grow from 83.3% of GDP in 2008 to almost 100% in 2010. With aging populations and costly entitlements system these action may spell disaster. In addition while politicians talk about crisis and the majority of economists support the stimulus, some economists are against because government is not able to spend a dollar in a way that it generates a dollar or more in value. In addition for every dollar that the government takes out of the private sector is a dollar the private sector doesn’t have to spend anymore. The key problem here is that in order to finance all this spending, the government has either to raise taxes or print more money which creates inflation and can cause great harm to the average consumer and will place a huge burden on future generations. In other words, new president, same spending policies designed to bury our kids in debt. [On this subject see Stossel's video on Bailouts]

Guide to politics and its miracles

John Stossel unveils on 20/20 a short and interesting politically incorrect guide to politics (source: abc )

Program is available at youtube in six portions on this page with the first attached below.

Pay up so Government can save you

As the credit crisis has pushed economies on the verge of recession or worse, governments have run to their rescue by announcing global bailout plans like drunken sailors. Britain led the way announcing sweeping semi-nationalization of the banking industry but the US has now outdone it announcing in the last 2 months over $1.5 in loans and investments to shore up its banking sector and buy toxic loans. The goal is to restore trust in the financial system, an essential element in a highly leveraged economy where faith in promises of paying back debts has virtually disappeared. The study of past economic depressions clearly shows that the early intervention of government is vital to stave off disaster but, especially in the midst of a presidential election, Americans are being told that more government intervention in the long, not only short, term will solve all sorts of problems: from anemic economic growth to energy independence, from health coverage to saving American jobs, etc. Never mind that government itself heavily contributed to creating this mess in the first place and  that government is already sowing the seeds of the next crisis. The US government’s debts have ballooned so extensively that the National Debt Clock in New York ran out of digits as the national debt level passed the $10 trillion point last month (note that when the clock was erected in 1989 debt was ‘only’ $2.7 trillion), a figure that amounts to $86k per family which is nearly double the average household income of an American family. Just as investors have lost confidence in the ability of companies to repay debts in this economy, the day will come when they will lose faith in the ability of American government to repay its own debt. The reality is that while politicians promise more public spending, the US government will soon mounting face pressure to reduce outlays and raise taxes to balance its books. What is scary is that Washington politicians are also unwilling to deal with another looming disaster of the big entitlement programs like Social Security and Medicaid whose costs will rise as the baby boomers retire. This situation combined with the silly claims that this financial crisis was created by deregulation (even taking accounting for Wall street’s greed, just look at how many federal and state agencies had oversight authority the financial industry or the market distortions introduced by Fannie Mae and Freddie Mac) will lead to bigger government. This is a trend that began with the last great depression and has led to the uncontrolled growth of the US federal government (federal debt has continued to increase both under Democratic and Republican administrations and congresses). Americans will pay dearly for their addiction to debt and their inability to stop public spending and unless they rediscover their founding fathers’ preference for limited government they can look forward to higher taxes, lower growth and the great diminishing of American power.

Balancing equality and prosperity

America is often criticized for having relatively high inequality (especially among rich countries) as measured by the Gini coefficient. Many Americans, however, believe that social mobility and getting opportunities to prosper may be more important. Income equality has some benefits: Nordic countries, which are the most equal, regularly do well in happiness surveys. More importantly the pursuit of income equality has a high cost: heavy ridistribution of wealth, slower economic growth and less opportunities and increased intrusion of government into people lives. The pursuit of equality can also produce disasters: it is no surprise that extensive government sectors and progressive policies have produced some of the highest levels of inequality especially in poor countries in South America and Africa.

Bailing Out Irrational America

As Americans debate the cost of bailing out the US financial systems the blame game has begun. The culprit seems to be as usual the Bush administration, lax regulation, and the free market capitalism. Although fashionable it is naive to just blame this crisis on the current president when in fact a major seed of this credit crisis was laid back in 1999, when Fannie Mae, the nation’s biggest underwriter of home mortgages, was pressured by the Clinton administration to get more loans to “borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans.” The Clinton inspired pilot program soon became general policy with money flowing to people who couldn’t afford to pay it back. It is no surprise that while in 1999 there was roughly $5 trillion in total U.S. mortgage debt that number ballooned to $12 trillion by 2007 aided by reckless financial firms (source U.S. Office of Federal Housing Enterprise Oversight). To put things into perspective, the total U.S. GDP is about $11 trillion annually, and U.S. government debt is around $9 trillion so if the housing market really falls apart there is no way the government can cover these losses; No wonder investors are worried. The sad thing is that Americans are now complaining about a financial system that while enriching CEOs also boosted their wealth as homeowners and consumers who delighted in shopping and living beyond their means. This is ridiculous: the blame for this financial mess rests on spendthrift Washington politicians of both parties who use government to promote populist policies, and most importantly on the American electorate who elects politicians with mandates to increase spending while keeping taxes low. Americans should accept the most blame for this mess and start to realize that without curbing reckless social policies, cutting government spending especially on entitlements (social security, medicare, medicaid) and living within their means, America will surely face serious decline in a matter of decades.  Blaming the market system which, although not perfect, is the best system to allocate capital is dangerous but not surprising given that despite the claims of ‘lax regulation’ government now encroaches on large tracts of public life. Bailing out the banking system vital to the economy and allocation of credit is understandable but American intolerance of failure does not bode well for the future. The success of the American economy is built on the ability of the free market system to reward efficiency and innovation while punishing the losers with failure. If the losers in competitive markets are not allowed to fail and the blind American taxpayer does not wake up to its responsibilities and risks of reckless finance, the end of American supremacy will be a self inflicted wound and not one caused by rising Asia.

A dramatic end for reckless American finance

This week has been dramatic for Wall Street and the American economy. After weeks of huge writedowns, the collapse of IndyMac and of Bear Stearns (parked withing JP Morgan) and the virtual nationaliziation of Fannie Mae and Freddie Mac, this week the American financial system reached the verge of collapse. Without a buyer and no government rescue, Lehman Brothers was forced into bankruptcy, Merrill Lynch sold itself to Bank of America and the US government was forced to lend $85 billion to AIG the world’s largest insurer virtually taking it over. This chaos led investors’ flight to safety and a loss of confidence that could turn illiquid institutions insolvent and led to a freezing up of Bank lending. As a result after investing billions of dollars the US federal government is now seeking a wider solution to the crisis to restore confidence by creating a fund that will be able to purchase up to $700 billion of residential or commercial mortgage securities at the heart of the problem to remove them from the banking system. While this action may restore investor confidence by creating a credible market, the American taxpayer risks to lose a fortune after all no one wants to own these toxic mortgage assets. The problem is that the alternative, collapse of the banking system, could cost a lot more: an average of 16% is what banking crises around the world have cost in the past 30 years according a recent study of the International Monetary Fund. In the end however even after the panic of 2008 will subside, pain will continue and recovery will be distant because banks and households have just started to cut their borrowing, which reached irrational proportions during the housing boom. Some people claim that this is the end of American capitalism but if anything this crisis shows the need for well regulated and transparent markets and the dreadful costs of rigging markets with distorted mortgage subsidies and the emergence of shadow banking and derivative systems.

Enjoy the cheap goods, they will not last

China has enjoyed great economic growth by becoming the manufacturing shop for the global economy thanks to its large population and vast supply of cheap labor. Company executives in China however are starting to complain about labor shortages and wages have been rising rapidly. This could be an indication that China’s surplus labor has been used up. This should not come as a surprise given that the country’s one-child policy introduced in 1979 has caused population growth to slow sharply. As a matter of fact the growth in the working-age population is expected to drop from an annual rate of 1.3% in 2005 to 0.1% by 2015. At the same time, the migration of workers from agriculture to industry will slow. In addition, the population is ageing, and there will be fewer young, single workers who are usually preferred by many industries. For those who fear the rise of China this slowing trend may be good news but for the rest of us who enjoy good deals it means that the seemingly never ending supply of cheap goods made in China is something that should be treasured until it last.

Freddie, Fannie and the power of Lobbyists

On Sunday September 7th on an historic move, America’s government’s seized control of Freddie Mac and Fannie Mae, the two giant semi-private mortgage agencies by taking them into “conservatorship” (just short of nationalization) until they are once again “sound and solvent”. Although the move was designed to stabilize panicky credit markets, it is full of risks for taxpayers because the eventual cost is unknown and could be huge. In addition taxpayers are exposed to bank failures through the Federal Deposit Insurance Corporation, which covers deposits up to $100,000 when lenders go bust. While these sort of rescues are vital during crisis the key is to avoid an expensive repeat and this is where the valuable lessons of the past are often conveniently ignored. Although some people will blame the free market and lax regulation for these failures, the fact remains that politicians and federal agencies who had full oversight over these 2 monsters were completely corrupted by the lobbyists of Fannie and Freddie, whose unparalleled political connections helped them to keep regulation toothless. It is appalling that while the media and the public quite correctly demand the prosecution of corrupt company bosses (see Enron), politicians in congress are rarely held accountable on legal grounds for their own huge failures. This attitude threatens the fabric of American democracy and the only effective way to reduce these  risks to the taxpayer remains be to shrink the size of government bureaucracy starting, one hopes, with the dismantling and privatization of Freddie and Fannie as soon as they recover and market stabilize.