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02/27/2011

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Upset Taxpayer

I hate to interrupt, but this is supposed to be an economics blog so I direct the writers to the fact that Greenspan has just issued a new
article in which "Greenspan calculates that long-term fixed corporate investment "is now at levels, relative to cash flow, that we have not experienced since 1940." This shortfall, he explains, accounts for much of the tepid recovery and current abnormally high levels of unemployment."

As a tax and spend Democrat, I agree, although Greenspan's explanation is just self serving hog wash about gov't activism, which I won't bother to read, because his incentive bias and man with a hammer approach make it impossible for him to offer honest insights.

For example, he claims to be able to see "gov't activism" in the data, which is just making it up, as he never applies such "lenses" to other events, insights, concerns, etc.

What economic model can discern between Bush tax cuts coupled with Cheney, "deficits don't matter" and fighting two wars on credit with no energy policy yet pin the blame on Obama. The guy is a fraud.

Further, Bloomberg's has just published two super informative charts showing the decline in public interest and R & D, as a per cent of GDP, especically gov't R & D, neither of which Greenspan considers.

This unhappy taxpayer joins other who have challenged the writers of this blog to speak the truth. Chart out what the trends have been in investment r& d, public and private since the start of the Reagan Revolution and then try to explain away how investment and research could be going done if tax cuts and income inequality were so good for the economy.

Jack, you need to follow up on this points

Jack

Upset: I've been thinking along similar lines as in my posts here on our unemployment problem being structural instead of the cyclical unemployments of the past. Economists (and pundits who try to be a bit more cheerful than the known data would justify) predict five years to employ the surplus labor. Obviously this such a slow pace that the gains may well be non-existent, or quickly reversed by oil price gouging, the housing foreclosure and recycling being a larger problem than predicted (hoped for?"

This brings us to the question of WHAT are we to do with millions of chronically unemployed? Are some (millions) to ride out the whole sentence on unemployment? and then welfare? Or? take turns as Walmart greeters and other casual labor that does not pay the bills? or allow one to "go shopping?"

Let's take a look at housing for a minute. Something on the order of 15 million homes were built during the last decade. At $200,000 each that's $3 trillion worth of economic activity done on speculation today, and paid for over the next 30 years. To accomplish this there was a lot of short term business investment as developers borrowed to build out a subdivision, the locality floated bonds for some of the streets, and utility hook-ups and builders large and small built the homes. "Payday" for the subdivider was when builders bought the lots and for builders, the day they closed on the home.

With little, on average, down, in essence this was, as housing has long been, employment and economic activity for all from landscapers to mortgage packagers now, that is paid for by the long term debt of the ultimate buyer. No harm so far...... as the books balance with $3 trillion of hard assets and something less in overall debt.

Leave out for now, the (still unprosecuted fraud) of the banksters that has surely resulted in building too many homes (as the S&L scam of the '80's built far too much commercial space) and perhaps the wrong homes in the wrong place and just focus on economic activity today paid for by long term debt.

The lost, primary, economic activity from housing being in the dumper and commercial about the same is well over $500 billion/yr and is compressing grosses in other sectors by the economic multiplier effect. Maybe this tallies to over $1 trillion in total GDP out of a total GDP of $14 trillion.

Soooooooo, we come to private sector businessmen and what's left of our banking system NOT finding worthy investments to make despite being loaded with unemployed capital even as real interest rates are next to zero. I'd say........ a strong hint that private investment in the US is going to be weak as you mention, or worse for some time.

So, our equation seems down to whether we tackle delayed infrastructure maintenance of $2 trillion at a pace approximating what's lost from housing being dead now and for years to come, and invest heavily in the long delayed transition from importing fossil fuels to cleaner, more sustainable alternative (and conservation efforts!!) despite our Treasury having been raided (by the rich who do not want to pay traditional tax rates) or............ do we sit here and likely spend just as much paying our guys on unemployment and welfare and have nothing to show five or ten years out? While the skills of, and employment chances, for our construction sector atrophy?

I see few other choices at a macro level, and CERTAINLY these problems are NOT going to be solved by a tax breaks for the wealthy (and unprosecuted WS thieves).

Anyone else have ideas or suggestions?

Jack

Whoops! Got a bit off topic -- perhaps. Anyway, will our profs who seem so concerned about "over diagnoses" soon write something about those under-diagnosed and served? Perhaps relating the soaring costs of H/C to stagnant and even declining wages for most of those "uncovered" or "covered" so inadequately as to become one of those making medical cost driven bankruptcy the Number One cause of personal bankruptcy? Seems, perhaps? an economic system and H/C system in the richest nation in the richest of eras ought to serve most of its citizens and workers?

Xavier

Upset Taxpayer,

Let me translate your pseudo scientific presentation of “facts” and “analysis” for people with insufficient time to read your lengthy oratory.

The smarter in the country should appoint people like you to run the government, which you will do based on the real “facts” and well understood science. We would further expect that one of your first acts will be to marginalize, being gentle in my choice of terms, nearly half of the country or the “Right” since according to you it is a well established fact that they are genetically inferior. And I suppose that that measure will include me because since you can’t see your way through any of my analysis surely I am on the “Right” and genetically inferior (wow, I didn’t know; thanks for that valuable information!).

And, of course, in cases like sonograms, we will dump the medical needs and personal choices of individuals and instead subject all to the statistical data…oops, I messed up, that would only constitute “A substantial part of that answer.” I suppose you and your data and science laden geniuses in Washington will provide us with the balance of the answer. Ever read Brave New World? 1984? Three cheers for them!

By the way, are you any relation to Depressed Taxpayer? Just saying based on the way you both use similar allusions to disparage those with whom you disagree.

Xavier

Jack,

In your reply to Upset you make some interesting and valid points. Since you are interested in methodology and the best information, for a possible explanation of the structural issues in the economy I suggest you read an alternative approach to economic modeling in “Economic Theory for the New Millennium” by Jay W. Forrester at

http://www.systemdynamics.org/conferences/2003/proceed/PAPERS/S02.pdf

Let me address the numbers, one of the main mechanisms, and the role of economists like Greenspan, but mainly of their Keynesian economics, that led to the housing debacle. Your stab at how much EXTRA housing was created by the excessive financing that became available during the period is a good one. I have tried myself to estimate the figure but can’t come up with anything better.

So let me start with your three trillion but narrow down that number to only the seven years between about roughly 2000 and 2007 when the crisis really started (with two mortgage funds of the largest French bank going under), and particularly the last four. In those years I also guesstimate that AT LEAST an EXTRA 500 billion went into housing over and above the normal rate.

The key to understanding the crisis, however, is not Wall Street, although they did play a major role, but foreign investors and the government, yes, the government. Understanding these is important to what the attempted solutions have been, and it is crucial to understanding why those solutions can’t continue.

In 1997/98, South East Asian countries went through a severe financial crisis that soon spread throughout the world. That crisis marked a turning point in world economic affairs. Before that crisis, emerging countries systematically borrowed foreign capital to finance growth. Most of those countries developed substantial net foreign liabilities. The result was that many of them periodically suffered severe financial and economic crises (like we will if we don’t shape up). In the 25 years before 1997/98 there were 125 such crises.

After 1997/98, they decided that the best way to avoid such problems was to stop borrowing in such large volumes and instead produce savings that they could hold for a rainy day. They decided to live within their means. As a result, instead of liabilities, they built up substantial net savings, which they held in foreign countries. Thus after 2000 there was an increasing flow of foreign capital into the US. By 2007, before the French funds went under, there was between 500 and 600 billion annually of extra flows into the US, over what had been the normal rate in the 1990s. The countries that were now lending to us were China, Japan, the Arabs, India, Russia, Brazil, Mexico, and other emerging economies. This shift from borrowing to lending was instrumental to financing the housing bubble.

When you think Wall Street don’t think of how they made those billions. They only owned themselves a small share of the bad mortgages but because they are very leveraged—by government design—it was enough to get them into trouble, some, the greedier, much more than others. But please remember something that everyone seems to forget. The money they invest is NOT THEIRS. It’s your and my money, our checking accounts and savings, which they invest on our behalf. And before you go down that tangent as so many others do, yes, Wall Street bankers have been earning too much money; I agree, but that is only a part of the problem.

One crucial reason why so much money went to housing has to do with Fannie Mae and Freddie Mac which always operated as semi-government entities and to whom investors lent money based on an implicit government guarantee. A lot of the money that Wall Street invested in mortgages was actually guaranteed by Fannie and Freddie!

Now, in the 1990s the government decided that it would be a good idea to invest the Peace Dividend from the end of the Cold War to increase the proportion of American households that owned their homes. To that effect they did principally two things.

They loosened regulations and they had Fannie and Freddie buy or guarantee more sub-prime and low quality mortgages (Alt-As). In fact Fannie and Freddie acted so irresponsibly that 10 days before the September 2008 crisis the government had to intervene them. At that point they had a combined portfolio of five trillion dollars! Yeah, so when you hear that the government already owes some 14 trillion you should add the five trillion that Fannie and Freddie are out. Moreover, when you hear data like that the Chinese hold 1.2 trillion dollars of government Treasuries, to that you should add probably another 500 billion of Fannie and Freddie paper. And it is all because the government wanted to increase the proportion of households that owned their own homes.

Okay, so where was Greenspan and the Fed all of this time. The key is Keynesian economics, which is pretty much the “gold” standard in Washington. Greenspan is criticized for keeping interest rates low while housing was going through the roof. To this day he insists that he was right. And by the Keynesian cookbook he was. Keynesians manage the economy using aggregates, including very importantly the aggregate price index. That index was not reflecting the run-up in housing prices because it only measures rents which lag prices, and even that is just a small share of the total. So for all they knew everything was hunky-dory. I have since asked a number of economists what they would have done had they had to intervene in the housing market and the truth seems to be that they don’t have the necessary surgical tools. They only have the blunter monetary policy instruments which would have thrown the economy into a recession.

But hey, maybe that is what was necessary. The economy, all of us more specifically, went on a spending binge with borrowed foreign money! Yes, ultimately that is the real problem! We were spending a lot of money we didn’t have, money lent to us by the Chinese, Japanese, Arabs, even Russians and Mexicans!

Now do you begin to see why we can’t continue spending ourselves into another euphoric period like the mid-2000s? Sure, some stimulus was necessary. Even I buy that part of Keynesian economics although I think it is not working well anymore for other reasons I won’t go into right now. But we can’t go back to the same level of spending relative to our production and GDP as during the first half of the 2000s. No way Jose, unless the Chinese and others continue lending to us at the same exorbitant levels. But they won’t. For one they won’t continue producing the same level of savings; they would be fools to do so now that they have built fairly large kitties. So if we keep spending like a drunkard with other people’s money bankruptcy is inevitable.

I now that some will label me Republican, conservative or some such for this position. But facts are facts and the analysis is as scientific as is possible with today’s knowledge. Even if we tried printing more money, which the Fed has been doing on a temporary basis, there is a limit. Thus far we have been able to do much of that because the dollar happens to be the reserve currency or anchor currency of the world economic system. But if we don’t go back to fiscal discipline even that will soon be a thing of the past. Instead we will have massive inflation and a highly devalued dollar. We just have to learn to tighten our belts, and do it as gently and humanly as is possible, period, full stop.

Jack

Xavier: So far I've been patient with you but the foregoing is utter hrsht.

You, or your tripist? try to make some grand case of capital being too plentiful. Thus? Banksters were "forced" to lend at THIRTY TIMES underlying assets? When five to ten is the long term standard?

Look I was close to new housing during the whole scam and WARNED a number of builders to pullback a couple YEARS before the bust. Number I convinced? ZERO. All wanted to go back to the well and even double or triple down right at the TOP of these graphs:

http://webcache.googleusercontent.com/search?q=cache:51_W7BsWWGsJ:mysite.verizon.net/vzeqrguz/housingbubble/+housing+price+graph&cd=1&hl=en&ct=clnk&gl=us&source=www.google.com

Now LOOK at those graphs, they are not just "pretty pictures" standing alone in the desert sun. First note how the mountain deviated from the long term trend that has served us well for 75 years? Now that trend line contains in it the contained wisdom of lending about 2.5 - 3 times family income. That's ALL that they can stand. The inverse is that of house payment taking 35% of pre-tax income; that's ALL anyone can reliably handle.

More? Note the chart showing MASSIVE deviation between "rental costs" and "ownership costs". Now what it that telling you or any banker worthy of the name? It means that unlike the prior 75 years of mortgage history that if (WHEN?) a family is forced to relocate for their job in our highly mobile workforce, that it the home can not be sold in a hurry, less than HALF of the ownership costs can be recouped by the owner (or bank) and risk is greatly increased.

No........ what HAPPENED in the mortgage biz WAS a fraudulent PONZI scheme scantily camouflaged by the handy excuse of "not understanding derivatives". Yah sure! You TALK of "values" but ARE falling for the biggest "Gee Mom I didn't know all those cookies were for Sis's B-day party" whopper in history.

ONE question just in case you're not convinced: We've THREE big bond rating firms: Moody's, S&P, and AM Best. Despite reps built over a century they ALL rated toxic GARBAGE triple A. Now TELL me that it's not their responsibility to have at least one nerd who DOES "understand" derivatives? ie garbage based on the fluff in those charts you just looked over? This was F R A U D pure and simple perpetrated for huge fees (BRIBES) for scoring the garbage so it could be pawned off on naive managers of retirement funds et al. FRAUD.

Bankers? The real ones are given special charters that allows them to lend at prudent man levels of risk, typically up to ten times underlying assets. That means it would take a 10% pull back to zero them out. And they OWE their depositors fiduciary interest to use common sense in lending. Gone! The WS thieves I guess you want to protect? were going out THIRTY times assets on the absolute fluff you see in the graphs.

Homework: Rent "Inside Job" which the other night won Best Documentary Feature, it will fill you in on the scam. GOOD too that those producers were able to tell that huge audience "And not ONE has yet been prosecuted and imprisoned".

As for your "Keynesian" stuff. Whew! all you seemed to GET out of the solutions I put forth for putting our guys back to work and HAVING SOMETHING at the end of this mess, is the vague idea that we'd just be spraying money around as if water a dead lawn on a hot day???

Do you REALLY favor our having 15% unemployed for the next five years? with double than number in our most economically deprived areas? How do YOU think that will work out about year three or so?

"Spending spree?" Yeah, when the entire "financial sector" goes rogue and delivers up the most economically distorted "market messages" in US history, yeah, what is done with the money will be a huge distortion too.

Neurotic fears about China "pulling out?" Ha! To some extent we hope they will! We are so intertwined that IF they opt to quit recycling dollars back to us, they float up the purchasing power of their yuan. Just what our Treasury Secretary is trying to do by jawboning 'em.

"Spending?" Well, you've been party to the GOP spending wildly and on about any "fun thing" that comes along. But! I thought you might be able to handle the diff between partying and ginning up option wars, and INVESTING in long delayed and necessary things in OUR nation. Simple bookkeeping really. You buy some hard asset -- like a needed bridge or school building of half a century life span and pay for it and the result? No change -- cash went out and an equal asset was gained. With considerable dividends including the smoothing of traffic bottlenecks and putting guys to work who'd otherwise be living on "rocking chair" money.

You see ANY alternative?

As for "tightening belts?" We've just discovered that the GOP and wet behind the ears 'baggers have NOT the taste for it when it's the (unaffordable) Bush tax breaks for the very well off. As for those down at median income? tighten what? The H/C mess you mention, soaring oil prices and related food costs AND un and underemployment HAVE tighten them up against the wall.

Remember -- we are 70% dependent on consumer spending, the reason Bushy told us to "go shopping" though sadly the fool didn't understand how tight the budgets of most Americans had already become.

IF.......... you STILL favor "tightening" review what happened when they lost their nerve in 1937. Aah, yes "can't afford New Deal spending". Five years later we "afforded" WWII the greatest Keynesian intervention in US history. Think about it.

Depressed Taxpayer

Xavier

Your mendacity tires me.

Never has Obama or any other Democrat proposed any limitation on what healthcare you can buy with your own money or, for that matter, what health insurance you can buy with your own money.

When you keep writing about "Brave New World? 1984? Three cheers for them," etc. This is nothing but lies and distortions on your part. If you are the Atlas of today, you can afford to buy your own health care and avoid what you fear.

The government has no obligation to provide health care or health insurance to any. Thus, if the government provides health care or health insurance, it can do so on pretty much whatever terms or conditions it chooses. This, by the way, is the lynch pin for the right wing attempt to defund abortions.

Thus, to be blunt, you are completely intellectually dishonest, so cut the crap.

You keep making the false charge that I am right and everyone else is wrong. To the contrary, my position is much different and that is we should totally disregard all of the right, because of financial bias and man with a hammer syndrome, and for similar reasons, and much of the left, for pretty much the same reason.

My position is simple, straight forward, right down the middle and based on simple common sense. We have a problem in this country with health care---its costs to much, it doesn't cover everyone, and its laced with stupidity, such as the wrong incentives created by making premiums tax deductible.

The federal government has pretty much unlimited power to regulate both the tax and commerical side of health care, so it is free to attempt any experiments or reforms anyone can get passed through Congress and signed by the President.

The Republicans had 6 years to attempt to repair the situation and only made it worse, with the donut whole. It was beyond stupid that Obama and the Democrats spent 2 years on Obamacare, but they did it---they had other higher priorities such as energency independence. It likely will not work and will have to be repaired, but so what. Nohting better illustrates that perfect is the enemy of good than the present dialogue about Obamacare

Jack

Don't be Depressed.... after all this week saw a detectable uptick in retail and other low paid service sector jobs!

"We have a problem in this country with health care---its costs to much, it doesn't cover everyone, and its laced with stupidity, such as the wrong incentives created by making premiums tax deductible."

......... Indeed! America became strong by producing wheat, corn, even rice, along with meat at much lower costs than others and, of course was very competitive in resource extraction and mfg. But spends nearly twice that of the other "advanced" nations on H/C. Normally the problem would be that of simply finding more efficient delivery means and deploying policies to drive out inefficiencies.

But it's become too big with too many stakeholders, and there exists the problem that those left behind the "rising tide" can not possibly afford to pay a pro rata share of the costs of a H/C system of 17% of GDP. Thus some of the costs, even with cost compression efforts -- if any are to be implemented -- will have to come from that which failed to "trickle" over these last three decades. Fairly simple math and seemingly an equitable and necessary social contract.

NEH

Jack, The "Trickle Down"? More like an Oratorical "Trick" (smoke and mirrors perhaps. Economically, the Nation has moved from "A chicken in every pot and car in every garage" to "Let them eat Cake". As a start point to rebuilding an equitable and viable Economy, may I direct everyone's attention to the seminal works of Hamilton, "Report on Manufactures" and Carey's, "The Harmony of Interests, Agricultural, Industrial and Commercial".

As for "health care", the problem once again, has been competing economic ideologies that have done more harm than good and a rampant and massive inflation in the Health Care Industry.

Joe Linker

I don’t know how “overdiagnosis” can still be “regarded as heresy,” not after reading Dr. Atul Gawande’s articles, including his ground-breaking article in the New Yorker, “The Cost Conundrum” http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande .
I’m posting because I don’t see Gawande’s name in Judge Posner’s piece or in any of the comments. “The Cost Conundrum” is the article that President Obama purportedly took into a staff meeting, declaring it mandatory reading, saying “this describes the problem we have to fix.”

NEH

Joe, Just finished with the New Yorker article, "The Cost Conundrum". Fascinating read and provides details supporting my contention regarding economic ideologies and the rampant and massive inflation in the Health Care Industry.

Once again, the Nation is confronted with the specter of uncontrolled "Free Markets, Free Trade" and unreasonable "Private Free Enterprise" of the Rebate and the like. Wasn't John D. and the Trusts taken to task for just this? ;)

Jack

“It’s not easy,” he said. But decades ago Mayo recognized that the first thing it needed to do was eliminate the financial barriers. It pooled all the money the doctors and the hospital system received and began paying everyone a salary, so that the doctors’ goal in patient care couldn’t be increasing their income. Mayo promoted leaders who focussed first on what was best for patients, and then on how to make this financially possible.

As economists have often pointed out, we pay doctors for quantity, not quality. As they point out less often, we also pay them as individuals, rather than as members of a team working together for their patients. Both practices have made for serious problems.

Providing health care is like building a house. The task requires experts, expensive equipment and materials, and a huge amount of coördination. Imagine that, instead of paying a contractor to pull a team together and keep them on track, you paid an electrician for every outlet he recommends, a plumber for every faucet, and a carpenter for every cabinet. Would you be surprised if you got a house with a thousand outlets, faucets, and cabinets, at three times the cost you expected, and the whole thing fell apart a couple of years later?

Dramatic improvements and savings will take at least a decade. But a choice must be made. Whom do we want in charge of managing the full complexity of medical care? We can turn to insurers (whether public or private), which have proved repeatedly that they can’t do it. Or we can turn to the local medical communities, which have proved that they can. But we have to choose someone—because, in much of the country, no one is in charge. And the result is the most wasteful and the least sustainable health-care system in the world.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

All interested in this subject which should be all concerned about our entire future should read at least the NYer article:

http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande?currentPage=8

Posner's lament of "overdiagnoses" seems little more than the hood ornament of the whole problem. Like banking the problem continues on from the supposed "defensive medicine" to gaming the system to outright fraud in the quest for higher incomes.

The author finds no means of reforming "fee for service" and we, including most economists would know that is true. With the best of intent those paying the bills, be they insurance, Medicare or the consumer would be behind the curve of knowing whether a procedure or other H/C element was priced right.

As with other industries the horse and buggy doctor shops will have to be consolidated into something approximating the Mayo model and if competition is to be a part of the system, which it well could be, it would be that of "Mayo" competing with Kaiser and a host of others. Would they then "skimp?" as Gawande wonders? It would seem that a combo of contracts much like today's insurance companies use (but better) oversight and Consumer Report-like ratings would protect the consumer's interests and perhaps better than is the case with patchwork system Gawande dismisses as "the most wasteful and the least sustainable health-care system in the world."

Indeed. As President Clinton said almost two decades ago "the worst thing we can do is keep on doing what we're doing now."


NEH Thanks for the suggestions. Will check them out.

blake k

The incentive structure in our health care system is messed up, but I think blaming testing for it is misguided at best. Take prostate cancer, the medical system tests everyone and mistreats 49 for every life it saves because it makes money every step of that process. Every unnecessary operation is cash in their pocket, and they don't earn more money for good outcomes. They have the technology to screen for cancer, then, if indicated do a great number of biopsies to locate the area of the prostate affected and freeze just that area. This has an order of magnitude fewer unneeded surgeries, and the surgeries have an order of magnitude fewer side effects. There needs to be some sort of system that rewards doctors for getting the best outcomes for the least expense, rather than what we have now, which is closer to cost plus rewards with little to no relationship to outcomes.

Xavier

Since some of you engage in personal attacks without even attempting to discuss the substance I was not going to post further. Yet I was intrigued by Jack’s comments based on The New Yorker article recommended by Joe Linker. It is excellent and deserves careful reading.

The article struck some notes. As I have indicated, for more than ten years I have had reason to pay very close attention to what is going on in healthcare, both because I participate in the oversight of a very large insurance plan, and because I have various complex medical issues, same as the patient that the author of the article said he observed a Mayo Clinic physician address.

In their posts Posner and Becker address mainly the free rider issue which I indicated in my entries may be the single largest driver of the cost of American medicine. The McAllen, Texas, described in the article is the perfect example.

And yes, coordination, but together with rationing, are two of the three keys to the whole problem. Markets coordinate and ration. However, in my entries I also mentioned values. The article makes the point wonderfully with its illustration of why and how the Mayo Clinic operates. The Mayo Clinic is driven first and foremost by a value system, one seemingly lost or moved to a second plane a long time ago by the medical profession: the Hippocratic Oath.

Beyond that the Mayo Clinic rightly places the very highest value on coordination. It is the coordinator together with the patient who ultimately decide what is and isn’t necessary and where the most economical solution can be found. Thus the importance of the example given of the physician who spent an hour with a patient with complex issues and even had the cardiologist come by. That physician was doing the duty of a primary-care-physician or PCP. But look at what has happened to PCPs in American medicine.

As a result of the pressure brought to bear by Medicare, the largest payer by far, which other insurers quite willingly followed, PCP remuneration dropped precipitously in the last 20 to 25 years and few are now even bothering to study that specialty. Twenty-five years ago my PCP, who unfortunately passed, spent that hour with me and called specialists when he needed to. But then his remuneration was cut, he was forced to join a hospital system, and he was also forced to see three or four patients an hour—like specialists who are only worried about one problem area! Before passing he instead took to taking my chart home and calling me Sunday nights every month or two! I know for fact that at that point his remuneration was not even close to that of a Mayo Clinic physician.

The bottom line is that the three most important considerations are coordination, rationing of a scarce resource (money, although apparently not in McAllen), and values. As near as I can tell most of the more vitriolic critics in this blog want government to do all three, and to the extent that government will leave rationing and coordination to doctors I suppose it will also define, educate, and enforce values.

Alternatively, as some of you and the government itself suggests, the preferred method will be a system of remuneration that rewards quality over quantity. Yeah, right, and I have a bridge to sell. How will you ever reconcile a money incentive with quality without a say in rationing and an adequate value system? Since so many of you get so upset with my suggestions that you even get personal, I’ll leave it as an open question.

And, by the way, if you think about the analogy between the electrician and the patient you will see that it breaks down fairly quickly. Worse yet, if you consider that PCPs once were the coordinators and used to be paid for the time required to coordinate, like contractors still are today, you will also see that with the demise of the PCP the electrician or medical specialist is now who determines what is required, as in McAllen. Since my old PCP passed I have been unable to find a PCP willing to periodically spend an hour helping me navigate the specialists. The good ones don’t take Medicare patients (the Mayo Clinic in Arizona doesn’t either anymore). So I am on my own and surely going through many more procedures than are really necessary. But then, hey, the price to me is zero so why should I care.

Jack

Xaivier: Thanks for not dropping out of the discussion. As none of us know each other, please don't take what may appear to be personal attacks.......... personally; it's only your viewpoint that is being challenged and I need not tell you the 'net still has some characteristics of the rough and tumble wild west.

I'm sorry to hear you've medical problems that are bouncing you around our patchwork med system somewhat like that of a pinball, but it does give you a front row seat for observing the growing cracks in the existing order.

Going back to the discussion, I'm not sure how you are using the "free rider problem" which I think most use in discussing the "free" H/C accorded those who either opt not to participate in H/C costs or those, increasingly many, who can not afford to participate. I guess that concept can be stretched to those insisting upon, or being conned into "over-diaganoses" by profit seekers lacking in ethics, along with the "overly treated? of Gawande's article. Both are a problem to be sure.

You, as many of the "right" appear to jump all too quickly to the subject of "rationing". Why so? We like a billion or so others live in a wealthy society in which nearly all who want one have a home, auto, even perhaps savings and perhaps a route to a retirement beyond that accorded by SS. As you know virtually all of those other advanced nations have universal H/C systems, albeit with some problems; like ours ascending costs, and perhaps the much ballyhooed "wait" or rationing of some procedures.

But! they are spending but half what we spend so it seems not beyond imagination that were we to "get it right" all could enjoy a H/C system that if not the most luxurious of Cadillacs, at least that of a mid-range Buick -- a car recently awarded Car of the Year status by Motor Trend.

Both you Posner and Becker seem inclined to "ration" on the basis of the almighty dollar. Taken to the extreme this would be pretty simple. We'd simply ban insurance companies (and perhaps apply the tax deductions now accorded corporations to all??) You can see what would happen, like lawyering, medical care would be little problem for the wealthiest, something of a burden for the upper middle class and crippling to non-existent for those working for the stagnant wages of the last 30 years.

And surely, "the market" would provide "us" with Lexus care for the well-heeled, Chevy for the upper mids and a choice of nothing or third tier bucket shops catering to those of little income.

But! too late! As those at the very bottom of the income heap have H/C via Medicaid or other welfare programs, including that of showing up half dead at the ER for the most costly and least efficient "H/C" on the face of the earth. Similarly those of lowest military rank, entry level jobs with most governing bodies, and the mail clerks of most large corporations are already accorded Chevy or perhaps Buick or better H/C and aren't about to give it up.

In short Americans are NOT given to rationing H/C. Given that we spend twice what our neighbors pay it would seem cost compression via efficiency improvements and a LOT better oversight of those Gawande ratted out in Texas; if they're abusing Medicare to that degree WHAT do you suppose they're doing to insurance companies?

Xavier

Jack, aha, I think I see the problem. We mean entirely different things by free rider. I am not an expert on the subject but have read some about it. Its most common usage in anthropology, sociology, and economics, where I’ve interacted most with others, it is like when I personally say the heck with it, I’ll go for another test or doctor’s visit because it is not costing me anything extra. That is excessive and unnecessary use. In my case I do it because I can’t find a PCP to help me make better choices

It has absolutely nothing to do with those who don’t participate in the H/C system. There is no question that that problem has to be addressed frontally, whether one is Republican or not (and how do you know I am not independent? If I had to choose it would probably be libertarian but on some issues, believe it or not, quite liberal! About the only things that I really care about strongly are big government or big anything, justice for the really poor, and believe me that there are very few of those I mean in this country, real participatory democracy, competition, and the real facts. I’ve always been an idea person and don’t really give a hoot for politics or for blaming anyone. I like to learn and solve problems, not blame people. My choice of small institutions and democracy is the product of analysis not ideology. There are no perfect solutions and every issue has two sides that need to be balanced. I could be wrong but until somebody shows me otherwise, on the merits and not ideological rhetoric, I’ll stick with my preferences and try to explain them).

My definition has to do with the extra demand when the price of a product or service to the actual user is zero or well below cost. That is why I say that even in our private insurance plan we police for excessive free riding. As I say, I myself free ride and sometimes I despair with our active managers for not modifying prices when there is obvious free riding or excessive and unnecessary use. Right now we are trying to figure out if we can come up with a right price and method of setting it for remunerating PCPs. The market has actually been experimenting with some methods but they are not yet approved for our plan and we may be blocked by Medicare.

As I said, McAllen is the perfect example of the free riding I mean. Their numbers are for Medicare so the users are obviously in the H/C system. McAllen is the extreme but in all statistics there has to be one of course. So we can’t go multiplying their numbers to arrive at an estimate of overall free riding. Another good example is the one I gave for the difference between overall medical costs of our member families, some $16,000 of which our company tries to cover 60 percent, and Cadillac plans that have been in the news that cost as much as $24,000 per family. That’s 50 percent more! We have racked our brains trying to imagine what anybody could be spending so much money on and we just can’t, but then when the price is absolutely zero for everything people and doctors over do it like in McAllen.

As you see from McAllen and my example the numbers for possible free riding, as per the definition of economics at least, are not trivial at all. They could explain a huge chunk of the differences between the US and other countries.

As to rationing, why is it so difficult to deal with the issue head on? We, you, all do it in every single transaction we enter into every day, other than H/C. It is what economics and markets are about. You say that Americans are not given to rationing “Given that we spend twice what our neighbors pay.” Come on, “we” don’t do the spending ourselves. Think of McAllen. For most of those of us in the H/C system our companies or the government spend for us. Ourselves we simply don’t. For most of us the price of most H/C services is zero. We don’t participate in any of the price setting; we just take it as it comes. Heck, sometimes when I have to go to the hospital I can't even find out how much was the cost. Actually, the more I think of it, addressing rationing or not is a bigger difference between us, even bigger than the definition of free rider.

Jack

Xavier: not to quibble over terminology, but I think you'll find that most call what you are describing as "overuse" Posner's "overdiagnoses" or even that of "abusing the system". "Free riders" in what passes for the H/C "debate" are typically those paying nothing and relying on the fact that if they do survive there motorcycle accident some good Samaritan will scrape them up, haul them in a fine and well-equipped Paramedic van to the nearest ER where a costly staff will go to work on them just as if they were paying members of one risk pool or another.

"Jack, aha, I think I see the problem. We mean entirely different things by free rider. I am not an expert on the subject but have read some about it. Its most common usage in anthropology, sociology, and economics, where I’ve interacted most with others, it is like when I personally say the heck with it, I’ll go for another test or doctor’s visit because it is not costing me anything extra. That is excessive and unnecessary use. In my case I do it because I can’t find a PCP to help me make better choices

It has absolutely nothing to do with those who don’t participate in the H/C system. There is no question that that problem has to be addressed frontally, whether one is Republican or not (and how do you know I am not independent?"

J: Ha! a bit on "parties". Names don't matter much! You'll recall that pre-LBJ not only signing the Voting Rights Act but using his consider size and arm-twisting talents to line up the last few votes, that "Dixiecrats" were quite "conservative" (and racist) but had enough sense to throw in with Dems across the nation on some labor issues, while many norther Republicans were more "liberal" than were southern Dixiecrats. 'tis quite a moving target.

If I had to choose it would probably be libertarian but on some issues, believe it or not, quite liberal! About the only things that I really care about strongly are big government or big anything, justice for the really poor, and believe me that there are very few of those I mean in this country, real participatory democracy, competition, and the real facts. I’ve always been an idea person and don’t really give a hoot for politics or for blaming anyone. I like to learn and solve problems, not blame people. My choice of small institutions and democracy is the product of analysis not ideology.

J: Interesting. Yet I'm tempted to bet heavily that even after the Bushies presided over the GREATEST expansion in the size and cost of government in there FIRST year, prior to having the excuse of warmongering expenses after ginning up the largest and most costly of post WWII wars, that you helped vote them back in '04.


There are no perfect solutions and every issue has two sides that need to be balanced. I could be wrong but until somebody shows me otherwise, on the merits and not ideological rhetoric, I’ll stick with my preferences and try to explain them).

J: Those favoring "smaller government" are likely to be greatly disappointed in the coming years. First off there is the matter of the D E B T being amassed as Reagan, HW and GW insisted on cutting tax rates for the wealthy but in NO way trimming expenses. The annual bill for that is now approaching that of having another military and will be the case for decades to come. Huge. Next GW and the Neocons have put us on a path that insures HUGE military budgets for decades to come. Against this backdrop you can throw widow out of public housing till the cows come home, but "size of government" will not be affected one bit.

My definition has to do with the extra demand when the price of a product or service to the actual user is zero or well below cost.

J: Welcome to the H/C debate! And contrary to conservative Posner's setting the terms of "debate" here on "overdiagnoses" how about when "free" (typically prepaid via insurance) services and products SAVE really big bucks? I can show you that POOR access to prenatal care for both urban and rural poor results in FAR higher rates of pre-mature births and birth defects. Situation in which a few single digit hundreds would have saved hundreds of thousands....... not to mention a tragic rate of infant mortality.

That is why I say that even in our private insurance plan we police for excessive free riding. As I say, I myself free ride and sometimes I despair with our active managers for not modifying prices when there is obvious free riding or excessive and unnecessary use.

J: Hmmm despite our earlier conversation you're still insistent on using dollars for "rationing?" Do you see an annual check up a "cost factor" or as it may well be, a cost saver? and surely something that pays dividends on overall health.

You'll note the US with all the massive expenditure is NOT a frontrunner in overall health stats. What are THEY doing for HALF the expense that gives them better results? How can anyone complacently defend the current mess and its skyrocketing expense when we don't even have the best outcomes?


Right now we are trying to figure out if we can come up with a right price and method of setting it for remunerating PCPs. The market has actually been experimenting with some methods but they are not yet approved for our plan and we may be blocked by Medicare.

J: Haha! once upon a time I was a software guy. Ha! I'd MUCH rather write the thing from scratch than try to patch someone else's "legacy mess". As a "conservative" why would you even want to patch up a MESS that came from the efforts of labor and others to get around WWII price/wage controls by offering "free" insurance and other benefits? WHAT does one's employer (justly) have to do with one's choice of H/C? Why would any with libertarian leanings favor a H/C program that's a result of one corporation making a deal with an insurance parasite corporation?

What does that costly middle man (unknown in single payer nations) bring to the party that justifies their mountains of costly paperwork and adversarial position? Have we not been brain-dipped into "feeling" we have to "save" an utterly unnecessary group of parasites? IF they wanted to play in the H/C arena, why don't we devise a system that forces them to become a Mayo or Kaiser and actually deliver a product?

As I said, McAllen is the perfect example of the free riding I mean. Their numbers are for Medicare so the users are obviously in the H/C system. McAllen is the extreme but in all statistics there has to be one of course.

J: Well, it's a MORE perfect example of why "fee for service" is a POOR means of charging for H/C. You'll recall that before Henry Ford cars were often sold as chassis with coachwork done elsewhere. No suppose "fee for service" was how cars were built and a bill came from the "truly excellent door fitter" et al. Despite "liking" "small" medicine today is a team/factory process and FAR better as in the Mayo example that the "specialist" is on the same team, can pop in for a quick conference (with your complex issues doesn't that sound like heaven, as compared to go across town, fill out a gob of papers, GET a confusing invoice, squabble with insurance parasite and pay something you suspect or are sure, is the wrong price?


So we can’t go multiplying their numbers to arrive at an estimate of overall free riding. Another good example is the one I gave for the difference between overall medical costs of our member families, some $16,000 of which our company tries to cover 60 percent, and Cadillac plans that have been in the news that cost as much as $24,000 per family. That’s 50 percent more! We have racked our brains trying to imagine what anybody could be spending so much money on and we just can’t, but then when the price is absolutely zero for everything people and doctors over do it like in McAllen.

J: Let me ask you something. Sort of a poll. For most of your life if seeing a doc or even going to the dentist were virtually free -- did you tend to overuse? or as I suspect most men, go because of being reminded or wife badgering etc? At your company -- absent actually investigating whether it's "over use" or providers getting good at gaming the system, my own guess is that like the nation in general your company has and aging workforce and it doesn't take many stent installations to add up!

As you see from McAllen and my example the numbers for possible free riding, as per the definition of economics at least, are not trivial at all. They could explain a huge chunk of the differences between the US and other countries.

J: You know we actually have ONE big advantage. The "others" went to single payer a long time ago, but as McAllen TX did so on "fee for service" or "visit" and you KNOW that creates a cat a mouse game. We did even WORSE by putting insurance parasites as the "third party payer". While the nations of tax based single payer have the same problem of trying to limit costs, it's easier for "insurance companies" to cut service and raise premiums than it is for a government body. Can you imagine "fee for service" paid by a third party working in any other facet of life? Groceries? Plumbing or taking care of the furnace?

By contrast look at the car biz. Some include 100,00 mile warranty with the purchase and extended warranties are available at reasonable cost. Of course it depend on staying up with preventative maintenance, and sometimes they're going to lose on a premature tranny failure, but on average come out OK. H/C is going to have to take on some of those attributes.

As to rationing, why is it so difficult to deal with the issue head on?

J: Ha! "rationing" "head on?" Ha! Now what precisely do you mean? That those sans dollars die in the streets?

We, you, all do it in every single transaction we enter into every day, other than H/C. It is what economics and markets are about.

J: I pray for the day when those of the "right" are allowed or desire to learn something of the econ they claim to deify. Indeed, I might buy a $5 latte, but $10?? Nope the utility to me is somewhere south of $5. But if a loved one or myself needs life saving medical care that I think is worth $50k if it's priced at $75K do I skip it? You know better than than we're not shopping used cars down at Honest Al's and as Gawande mentioned are we to take the ten minute of Doc time to try to beat down his price?

You say that Americans are not given to rationing “Given that we spend twice what our neighbors pay.” Come on, “we” don’t do the spending ourselves.

J: "WE" globally spend 17% of our (nearly) largest GDP in the world. Germany I think, is 2nd at 11% of their GDP.


Think of McAllen. For most of those of us in the H/C system our companies or the government spend for us. Ourselves we simply don’t.

J: Indeed. If Gawande didn't quite charge them with fraud he came close, and the Obama Admin just prosecuted a bunch of Medicare fraudsters. The topic IS that of getting OUR H/C cost under control. IF we ARE to spend Caddy amounts we SHOULD have Caddies for all.


For most of us the price of most H/C services is zero. We don’t participate in any of the price setting; we just take it as it comes.

J: That's just silly. You KNOW that which your company is paying for H/C gouging IS coming out of your pay package. And, you KNOW that when others don't pay, the cost IS spread over the hospital and doc cost of others. One econ truth is that of their being no free lunch. WE are paying BIG time. Consider those of your age who can't change jobs or go out on their own due to "pre-existing" conditions and H/C concerns. Our autos and other products being less competitive due to the H/C costs, ONE reason Ford and others build cars in Canada.

Heck, sometimes when I have to go to the hospital I can't even find out how much was the cost.

J: Ha! I KNOW the drill! No two deliveries of $10 aspirins are billed at the same price. And once "the cost" is known, what really do we know? If the anethesia guy gets $700 for standing by during a 12 minute cataract operation "just in case" how do I know if that's "the right price?"

Actually, the more I think of it, addressing rationing or not is a bigger difference between us, even bigger than the definition of free rider.

J: Well "head on" and tell me what you have in mind. Many of the "right" seem to vaguely like "rationing" but begin tap dancing toward the door once a normal guy tries to pin them down on the details. Let me know what you'll do or feel if it's your daughter being rationed, OK?

Peter Li

Mr. Posner,

This is an interesting point, and I definetly agree with the other commentors that motivations of individual actors should be taken in account when considering how economic activities work.

However, as a medical student, I've seen even in mainstream medical education a voice for some of the concerns in this article. We have had discussions of the cost and benefits of screening tests such as the PSA or screening for ovarian cancer. I think it's likely in the future this could extend to considerations of resource consumption.

While doctors are only human and many will naturally use their positions in the system to exploit their earning potentials, I think there's a significant element of professionalism and scientific ethic as well. It would be a fallacy to think that a large proportion of doctors would not be interested in these issues.

-Peter Li

Kim

Having both lawyers and Dr.'s in the family, I am witness to both sides of the issues here. You are absolutely correct that a Dr. has to practice defensive medicine, and order screening tests to avoid spending months in the courtroom. There has to be balance achieved somewhere in our system on both sides. Things are completely "out of whack."

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