This Is Not The Way To Do Healthcare Reform: Democrats Propose Windfall For Insurance Industry
By L. Randall Wray
It is beginning to look like Congress is going to vote to pass health care legislation on Sunday. According to the NYTimes, Democrats are practically celebrating already. here
It is interesting, however, that no one is talking about providing benefits to the currently underserved.
Rather, the “good news” is that the bill is supposed to be “the largest deficit reduction of any bill we have adopted in Congress since 1993,” according to House Democratic leader, Rep.Steny H. Hoyer of Maryland. “We are absolutely giddy over the great news,” said the House’s number three Democrat, Rep. James Clyburn of South Carolina. (Of course, deficit hysteria is nothing new. See here
Who would have thought that health care “reform” would morph into deficit cutting?
As Marshall Auerback and I argue in a new policy brief here
, the proposed legislation is not “reform” and it will not reduce US health care costs. I will not repeat the arguments there. But very briefly, the most significant outcome of this legislation is the windfall gain for insurance companies—who will be able to tap the wages of the huge pool of nearly 50 million Americans who currently do not purchase health insurance. Since many of these are too poor to afford the premiums, the government will kick in hundreds of billions of dollars to line the pockets of health insurers. This legislation has nothing to do with improving health services for the currently underserved—it is all about increasing the insurance sector’s share of the economy.
You might wonder how Democrats can call this a deficit reduction deal? Elementary, dear Watson. They will slash Medicare spending. No wonder—it stands as an alternative to the US’s massively inefficient private insurance system, hence, needs to be downsized in favor of an upsized private system.
There is nothing in the deal that will significantly reduce health care costs. At best, it will simply shift more costs to employers and employees—higher premiums, higher deductibles, higher co-pays, and more exclusions forcing higher out-of-pocket expenses and personal bankruptcies. As we show in our paper, the US’s high health care costs (at 17% of GDP, double or triple the per capita costs in other similarly wealthy nations) are due to three factors. As many commentators have argued (especially those who advocate single-payer) part of the difference is due to the costs of operating a complex payment system that relies on private insurers—resulting in paperwork and overhead costs, plus high profits and executive compensation for insurance executives. This adds about 25% to our health care system costs. Obviously, the proposed legislation is “business as usual”, actually adding more insurance costs to our system.
In addition, Americans spend more for medical supplies and drugs. Since the Democrats ruled out any attempt to constrain Big Pharma through, for example, negotiating lower prices for drugs, there will not be any savings there.
Finally, and most importantly, the biggest contributor to higher US health care costs is our American “lifestyle”: too little exercise, too much bad food, and too much risky behavior (such as smoking). here
This is why we spend far more on outpatient costs for chronic diseases such as diabetes—40% of healthcare spending and rising rapidly. Ending the subsidies to Big Agriculture that produces the products that make us sick would not only do more to improve US health outcomes than will the proposed legislation, but it would also reduce health care spending—while reducing government spending at the same time. That would be real healthcare reform! But, of course, no one talks about this.
Interestingly, according to the NYTimes article, President Obama likened the legislation to fixing the financial system or passing the economic recovery act. “I knew these things might not be popular, but I was absolutely positive that it was the right thing to do,” he said. That is an apt and scary comparison. This legislation will do as much to “fix” the US healthcare system as the Obama administration has done to “fix” the financial sector and to put the economy on the road to recovery?
Of course, we have not done anything to “fix” the financial sector, or to put Mainstreet on the road to recovery.
I think the President’s comparison is uncannily accurate. So far the main thing his administration has done is to funnel trillions of dollars to the FIRE sector in an attempt to restore money manager capitalism. The current legislation will simply continue that policy—the trillions spent so far to bail-out Wall Street have not been nearly enough. Hence, the effort to funnel billions more to the insurance industry.
But what is the connection between Wall Street and health insurers? As Marshall and I argue in our brief, they are “two peas in a pod” since the deregulation of financial institutions. We threw out the Glass-Steagall Act that separated commercial banking from investment banking and insurance with the Gramm-Leach-Bliley Act of 1999 that let Wall Street form Bank Holding Companies that integrate the full range of “financial services”, that sell toxic waste mortgage securities to your pension funds, that create commodity futures indexes for university endowments to drive up the price of your petrol, and that take bets on the deaths of firms, countries, and your loved ones. See also here
Hence, extension of healthcare insurance represents yet another unwelcome intrusion of finance into every part of our economy and our lives. In other words, the “reforms” envisioned would simply complete the financialization of healthcare that is already sucking money and resources into the same black hole that swallowed residential real estate. here
Just as the bail-out of Wall Street was sold on the argument that we need to save the big banks so that they will increase lending to Main Street, health care “reform” was initially promoted as a way to improve provision of healthcare to the underserved. What we got instead is a bail-out for insurers and cuts to Medicare. Funny how that happens.
Tag Archives: Randall Wray
Social Security commentary published
Social Security: Another Case of Innocent Fraud?
By Mathew Forstater and Warren Mosler
August 6th — In his recent book, The Economics of Innocent Fraud, John Kenneth Galbraith surveys a number of false beliefs that are being perpetuated among the American people about how our society operates: innocent (and sometimes not-so-innocent) frauds. There is perhaps no greater fraud being committed presently—and none in which the stakes are so high—as the fraud being perpetrated regarding government insolvency and Social Security. President Bush uses the word “bankruptcy†continuously. And the opposition agrees there is a solvency issue, questioning only what to do about it.
Fortunately, there is a powerful voice on our side that takes exception to the notion of government insolvency, and that is none other than the Chairman of the Federal Reserve. The following is from a transcript of a recent interview with Fed Chairman Alan Greenspan:
-
RYAN… do you believe that personal retirement accounts can help us achieve solvency for the system and make those future retiree benefits more secure?
GREENSPAN: Well, I wouldn’t say that the pay-as-you-go benefits are insecure, in the sense that there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created
which those benefits are employed to purchase. (emphasis added)
For a long time we have been saying there is no solvency issue (see C-FEPS Policy Note 99/02 and the other papers cited in the bibliography at the end of this report). Now with the support of the Fed Chairman, maybe we can gain some traction.
Let us briefly review, operationally, government spending and taxing. When government spends it credits member bank accounts. For example, imagine you turn on your computer, log in to your bank account, and see a balance of $1,000 while waiting for your $1,000 Social Security payment to hit. Suddenly the $1,000 changes to $2,000. What did the government do to make that payment? It did not hammer a gold coin into a wire connected to your account. It did not somehow take someone’s taxes and give them to you. All it did was change a number on a computer screen. This process is operationally independent of, and not operationally constrained by, tax collections or borrowing.
That is what Chairman Greenspan was telling us: constraints on government payment can only be self-imposed.
And what happens when government taxes? If your computer showed a $2,000 balance, and you sent a check for $1,000 to the government for your tax payment, your balance would soon change to $1,000. That is all—the government changed your number downward. It did not “get†anything from you. Nothing jumped out of the government computer into a box to be spent later. Yes, they “account†for it by putting information in an account they may call a “trust fund,†but this is “accountingâ€â€”after the fact record-keeping—and has no operational impact on government’s ability to later credit any account (i.e., spend!).
Ever wonder what happens if you pay your taxes in actual=2 0cash? The government shreds it. What if you lend to the government via buying its bonds with actual cash? Yes, the government shreds the cash. Obviously, the government doesn’t actually need your “funds†per se for further operational purpose.
Put another way, Congress ALWAYS can decide to make Social Security payments, previous taxing or spending not withstanding, and, operationally, the Fed can ALWAYS process whatever payments Congress makes. This process is not revenue constrained. Operationally, collecting taxes or borrowing has no operational connection to spending. Solvency is not an issue. Involuntary government bankruptcy has no application whatsoever! Yet “everyone†agrees—in all innocence—that there is a solvency problem, and that it is just a matter of when. Everyone, that is, except us and Chairman Greenspan, and hopefully now you, the reader, as well!
So if solvency is a non-issue, what are the issues? Inflation, for one. Perhaps future spending will drive up future prices. Fine! How much? What are the projections? No one has even attempted this exercise. Well, it is about time they did, so decisions can be made on the relevant facts.
The other issue is how much GDP we want seniors to consume. If we want them to consume more, we can award them larger checks, and vice versa. And we can do this in any year. Yes, it is that simple. It is purely a political question and not one of “finance.â€
If we do want seniors to participate in the future profitability of corporate America, one option (currently not on the table) is to simply index their future Social Security checks to the stock market or any other indicator we select—such as worker productivity or inflation, whatever that might mean.
Remember, the government imposes a 30% corporate income tax, which is at least as good as owning 30% of all the equity, and has at least that same present value. If the government wants to take a larger or smaller bite from corporate profits, all it has to do is alter that tax—it has the direct pipe. After all, equity is nothing more than a share of corporate profits. Indexation would give the same results as private accounts, without all the transactional expense and disruption.
Now on to the alleged “deficit issue†of the private accounts plan. The answer first—it’s a non-issue. Note that the obligation to pay Social Security benefits is functionally very much the same as having a government bond outstanding—it is a government promise to make future payments. So when the plan is enacted the reduction of future government payments is substantially offset†by future government payments via the new bonds issued. And the funds to buy those new bonds come (indirectly) from the reductions in the Social Security tax payments—to the penny. The process is circular. Think of it this way. You get a $100 reduction of your Social Security tax payment. You buy $100 of equities. The person who sold the equities to you has your $100 and buys the new government bonds. The government has new bonds outstanding to him or her, but reduced Social Security obligations to you with a present value of about $100. Bottom line: not much has changed. One person has used his or her $100 Social Security tax savings to buy equities and has given up about $100 worth of future Social Security benefits (some might argue how much more or less than $100 is given up, but the point remains). The other person sold the equity and used that $100 to buy the new government bonds. Again, very little has changed at the macro level. Close analysis of the “pieces†reveals this program is nothing but a “wheel spin.â€
Never has so much been said by so many about a non-issue. It is a clear case of “innocent fraud.†And what has been left out? Back to Chairman Greenspan’s interview—what are we doing about increasing future output? Certainly nothing in the proposed private account plan. So if we are going to take real action, that is the area of attack. Make s ure we do what we can to make the real investments necessary for tomorrow’s needs, and the first place to start for very long term real gains is education. Our kids will need the smarts when the time comes to deal with the problems at hand.
References
•Galbraith, John Kenneth, 2004, The Economics of Innocent Fraud: Truth for Our Time, Boston: Houghton Mifflin.
•Wray, L. Randall, 1999, “Subway Tokens and Social Security,†C-FEPS Policy Note 99/02, Kansas City, MO: Center for Full Employment and Price Stability, January, (http://www.cfeps.org/pubs/pn/pn9902.html).
•Wray, L. Randall, 2000, “Social Security: Long-Term Financing and Reform,†C-FEPS Working Paper No. 11, Kansas City, MO: Center for Full Employment and Price Stability, August, (http://www.cfeps.org/pubs/wp/wp11.html).
•Wray, L. Randall and Stephanie Bell, 2000, “Financial Aspects of the Social Security ‘Problem’,†C-FEPS Working Paper No. 5, Kansas City, MO: Center for Full Employment and Price Stability, January, (ht tp://www.cfeps.org/pubs/wp/wp5.html).
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Re: liquidity or insolvency–does it matter?
(email with Randall Wray)
On Dec 15, 2007 9:05 PM, Wray, Randall wrote:
> By ________
>
> This time the magic isn’t working.
>
> Why not? Because the problem with the markets isn’t just a lack of liquidity – there’s also a fundamental problem of solvency.
>
> Let me explain the difference with a hypothetical example.
>
> Suppose that there’s a nasty rumor about the First Bank of Pottersville: people say that the bank made a huge loan to the president’s brother-in-law, who squandered the money on a failed business venture.
>
> Even if the rumor is false, it can break the bank. If everyone, believing that the bank is about to go bust, demands their money out at the same time, the bank would have to raise cash by selling off assets at fire-sale prices – and it may indeed go bust even though it didn’t really make that bum loan.
>
> And because loss of confidence can be a self-fulfilling prophecy, even depositors who don’t believe the rumor would join in the bank run, trying to get their money out while they can.
If there wasn’t credible deposit insurance.
>
> But the Fed can come to the rescue. If the rumor is false, the bank has enough assets to cover its debts; all it lacks is liquidity – the ability to raise cash on short notice. And the Fed can solve that problem by giving the bank a temporary loan, tiding it over until things calm down.
Yes.
> Matters are very different, however, if the rumor is true: the bank really did make a big bad loan. Then the problem isn’t how to restore confidence; it’s how to deal with the fact that the bank is really, truly insolvent, that is, busted.
Fed closes the bank, declares it insolvent, ‘sells’ the assets, and transfers the liabilities to another bank, sometimes along with a check if shareholder’s equity wasn’t enough to cover the losses, and life goes on. Just like the S and L crisis.
>
> My story about a basically sound bank beset by a crisis of confidence, which can be rescued with a temporary loan from the Fed, is more or less what happened to the financial system as a whole in 1998. Russia’s default led to the collapse of the giant hedge fund Long Term Capital Management, and for a few weeks there was panic in the markets.
>
> But when all was said and done, not that much money had been lost; a temporary expansion of credit by the Fed gave everyone time to regain their nerve, and the crisis soon passed.
More was lost then than now, at least so far. 100 billion was lost immediately due to the Russian default and more subsequently. So far announced losses have been less than that, and ‘inflation adjusted’ losses would have to be at least 200 billion to begin to match the first day of the 1998 crisis (August 17).
>
> In August, the Fed tried again to do what it did in 1998, and at first it seemed to work. But then the crisis of confidence came back, worse than ever. And the reason is that this time the financial system – both banks and, probably even more important, nonbank financial institutions – made a lot of loans that are likely to go very, very bad.
Same in 1998. It ended only when it was announced Deutsche Bank was buying Banker’s Trust and seemed the next day it all started ‘flowing’ again.
>
> It’s easy to get lost in the details of subprime mortgages, resets, collateralized debt obligations, and so on. But there are two important facts that may give you a sense of just how big the problem is.
>
> First, we had an enormous housing bubble in the middle of this decade. To restore a historically normal ratio of housing prices to rents or incomes, average home prices would have to fall about 30 percent from their current levels.
Incomes are sufficient to support the current prices. That’s why they haven’t gone down that much yet and are still up year over year. Earnings from export industries are helping a lot so far.
>
> Second, there was a tremendous amount of borrowing into the bubble, as new home buyers purchased houses with little or no money down, and as people who already owned houses refinanced their mortgages as a way of converting rising home prices into cash.
Yes, there was a large drop in aggregate demand when borrowers could no longer buy homes, and that was over a year ago. That was a real effect, and if exports had not stepped in to carry the ball, GDP would not have been sustained at current levels.
>
> As home prices come back down to earth, many of these borrowers will find themselves with negative equity – owing more than their houses are worth. Negative equity, in turn, often leads to foreclosures and big losses for lenders.
‘Often’? There will be some losses, but so far they have not been sufficient to somehow reduce aggregate demand more than exports are adding to demand. Yes, that may change, but it hasn’t yet. Q4 GDP forecasts were just revised up 2% for example.
>
> And the numbers are huge. The financial blog Calculated Risk, using data from First American CoreLogic, estimates that if home prices fall 20 percent there will be 13.7 million homeowners with negative equity. If prices fall 30 percent, that number would rise to more than 20 million.
Not likely if income holds up. That’s why the fed said it was watching labor markets closely.
And government tax receipts seem OK through November, which is a pretty good coincident indicator incomes are holding up.
>
> That translates into a lot of losses, and explains why liquidity has dried up. What’s going on in the markets isn’t an irrational panic. It’s a wholly rational panic, because there’s a lot of bad debt out there, and you don’t know how much of that bad debt is held by the guy who wants to borrow your money.
Enough money funds in particular have decided to not get involved in anyting but treasury securities, driving those rates down. That will sort itself out as investors in those funds put their money directly in banks ans other investments paing more than the funds are now earning, but that will take a while.
>
> How will it all end?
This goes on forever – I’ve been watching it for 35 years – no end in sight!
> Markets won’t start functioning normally until investors are
> reasonably sure that they know where the bodies – I mean, the bad
> debts – are buried. And that probably won’t happen until house prices
> have finished falling and financial institutions have come clean about
> all their losses.
And by then it’s too late to invest and all assets prices returned to ‘normal’ – that’s how markets seem to work.
> All of this will probably take years.
>
> Meanwhile, anyone who expects the Fed or anyone else to come up with a plan that makes this financial crisis just go away will be sorely disappointed.
Right, only a fiscal response can restore aggregate demand, and no one is in favor of that at the moment. A baby step will be repealing the AMT and not ‘paying for it’ which may happen.
Meanwhile, given the inflationary bias due to food, crude, and import and export prices in genera, a fiscal boost will be higly controversial as well.
♥
Wray discussion
(an email with Randall Wray)ÂÂÂ
On Dec 11, 2007 10:49 PM, Wray, Randall <WrayR@umkc.edu> wrote:
> Warren: very respectfully, I suggest you might reconsider both your model of the fed’s reaction function as well as the likely course of the “real” economy.
>
> Whatever the fed might have said about “fighting inflation” back last summer is not relevant to near- and medium-term policy. The fed is scared nearly out of its mind about financial mkts and spill-over to the “real economy”. Further, it realizes all inflation pressures are in sectors over which it has no control, and that are just “relative value” stories. Yes, there can be some feed thru effects to nominal values, but the Fed can’t do anything about it. Inflation will not enter the Fed’s decision making in the near and medium term. Yes, they will continue to pay lip-service to it, since their whole strategy of inflation management relies on expectations. But they are far more concerned with asset prices, financial markets, and, less importantly, economic performance.
Already agreed. As Karim says it, they want to put the liquidity issue to be first, then worry about inflation.
I’m guessing that the ‘new’ liquidity facility they just announced that will be used to set rates over year end for member banks with a greatly expanded list of acceptable collateral may do the trick.
If so, much of the ‘fear’ is gone, and it’s back to the more traditional and ‘comfortable’ inflation vs the economy, which is a
whole different ball game.
>
> The “markets” are also scared out of their minds. Maybe they are all completely wrong, and you are the lone voice of reason. Maybe nothing is going to spill-over into the real sector. But it is worth considering that MAYBE they are correct.
I do give that some weight. Maybe 25%? And with govt, pensioners, and indirect govt sectors not going to slow down, the rest has to slow down quite a bit just to get to 0 real growth. In fact, I see the biggest chance of negative growth coming with ok nominal growth but a high deflator due to statistical variation. Nominal shows no signs of slowing, and it is a monetary economy.
 My continuing point, however, is that it’s not happening yet, nor is anything I’m seeing that is yet showing actual weakness, apart from so far anecdotal statements about retail sales, and the .2 nominal personal spending number last reported. I have also seen nothing but low gdp forecasts getting revised up continuously. Maybe that changes. However, if demand does weaken, I’m not sure it would be due to the financial losses as I still see no ‘channel’ from that to the real economy, apart from CNBC scaring people into not spending, and that is not a trivial effect! But so far there doesn’t seem to anything reducing personal income, and borrowing power seems reasonable if the desire is there for (now cheaper) homes, cars, computers, etc. with a non trivial amount coming from export earnings, which seem to be going parabolic.
> In any case, it will probably help you to predict what mkts are doing if you consider that they REALLY believe we are headed for a hard crash, and that this is not just media manipulation. They could be completely wrong. But at least we can predict their behavior.
I hear you, and in fact that has been my explanation of why they 50 in Sept, and then 25 in Oct- blind fear of the unknown/crash landing. But how does that explain yesterdays outcome? It was at the very low end of expectations. They even were stingy on the discount rate spread, which costs them nothing in terms of inflation. All you can say is they were trying to avoid moral hazard risk, which indicates a lot less fear of hard landing than previously, along with reasonably
harsh language on inflation to ‘explain’ to the markets the stinginess of their actions?
>
> I do agree with you that there will be a reversal tomorrow, and after every disappointment at the Fed’s actions. But that is froth. Mkts have to take profits where they can find them–and after 300 points down, the mkt looks cheap. Yes, mortgages are being made. Yes, investment banks will buy-out insurers (to minimize losses–even if the insurers eventually go bankrupt), and so on. You get profits where you can, or you lose all of your business.
Right, a basic driver of capitalism. The old ‘fear vs greed’ pendulum.
>But massive losses and write-downs will continue. Maybe they are
wrong to do it; maybe it is just paper shuffling; but it is worth
considering that after a few trillion dollars of losses, there could
be a real effect on the economy.
Sure, but you know as well as anyone the real economy is a function of agg demand. And there’s been no credible channel discussed of how agg demand gets reduced that’s showing up anywhere in the data. To the contrary, the non resident sector has suddenly become a source of demand for US output that’s already more than made up for the outsized
and sudden drop from the housing sector, as the bid for housing from sub prime borrowers vanished. That’s an example of a major demand channel vanishing that could have taken the economy down, but was coincidentally rescued by the foreign sector. The present value gains from the new export demands are roughly offsetting the pv losses from the sub prime bid vanishing. Hence, equity markets are up about 10% for the year.
The siv’s, the spv’s the junior tranches, and the super senior tranches all have massive negative present values. Yes, if we can ride it out, in 10 years they could all come back. As keynes said, life is too short.
We don’t have to ride out anything if our purchasing power is unchanged at the macro level, and we can sustain demand for our output.
>
> Even if all we are interested in is to predict what the fed and mkts are going to do, it is worth considering that the Fed BELIEVES it is fighting a Fisher-type 1930s debt deflation that will bring down the whole economy, and that most in the mkts also believe that is a plausible outcome.
Agreed!
>They might all be crazy. But they can be self-fulfilling.
yes, as above.
>So far as I know, EVERY former fed official who is now free to speak
is projecting more rate cuts and recession and maybe worse. That
includes mister inflation hawk Larry Meyer (for whom I TA-ed). The
notion that inflation is a problem just is not going to get traction.
maybe not. but they all blow with the wind- especially the media- and after this weeks inflation numbers we’ll have a better idea.
>
> I could be wrong, but I’m not paid to be right! I view it all as a bemused spectator. However, millions of Americans WILL lose their homes. Maybe they shouldn’t have them. I do not know, but I do lean toward the view that they should and that policy ought to aim for protecting home ownership. In any case, I find it very hard to believe that will have no effect on the economy.
We’ve already had the effect, as above, and it’s been offset by export earnings, at least so far. Maybe ‘millions’ will lose ownership, but they won’t be unemployed and homeless. They will rent, or get owner financing, or get bailouts from relatives, etc. Mtg rates are down from last summer, affordability is up, and employment is relatively high as well.
The only thing to fear is CNBC itself.
Thanks!!!
Warren
> L. Randall Wray
> Research Director
> Center for Full Employment and Price Stability
> 211 Haag Hall, Department of Economics
> 5120 Rockhill Road
> Kansas City, MO 64110-2499
> and
> Senior Scholar
> Levy Economics Institute
> Blithewood
> Bard College
> Annandale-on-Hudson, NY 12504