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July 24, 2009

Economist's View - 6 new articles

From 1983: Health Care Reform in Canada

This is an article on health care reform in Canada from February 15, 1983. As the article explains, "The Canadian health system is really nothing more than an insurance plan for all citizens. The Federal Government and each of the 10 provincial governments put up the money, which comes from income taxes, sales taxes and, in the case of three provinces, premiums. Doctors bill the province for medical services." The issue the Canadian system faced was that some doctors had begun charging the government insurance plans more than the mandated fees, something many saw as a movement toward a private or two-tiered system and hence a threat to public health care in Canada. I was struck by how many similarities there are in the arguments to what we are hearing today. It's also interesting to look back and determine which of the scary stories about the future have come true:

Health Care in Canada: Popular System now Rocked by Criticism, by Douglas Martin, NY Times, 2/15/1983: Toronto - When Tommy Douglas was a boy, a Winnipeg doctor told him that he was suffering from a bone disease called osteomyelitis and that his leg would have to be cut off. Only because a brilliant young orthopedic surgeon decided to use the young charity patient for a teaching demonstration was he lucky enough to avoid the amputation. ''Had I been a rich man's son,'' Mr. Douglas says, ''the services of the finest surgeons would have been available. As an iron molder's boy, I almost had my leg amputated before chance intervened and a specialist cured me without thought of a fee.'' Mr. Douglas grew up to become the Premier of Saskatchewan, head of one of the first socialist governments in North America. In 1962, his party established a comprehensive medical insurance system, providing, in his words, ''complete medical care without a price tag.'' By 1971, such a system, administered by individual provinces and financed partly by the Federal Government, had been extended to cover every Canadian.

But now this comprehensive medical insurance system - which provides health care at substantially lower cost than the American system and has been closely watched by United States policy makers as a possible model for imitation - is confronted by wrenching pressures. The Canadian medical system lies somewhere between the American entrepreneurial approach and British nationalization.

A growing number of critics say that Canadian medicine has become bloated and inefficient, and they assert that the Federal and provincial governments no longer have effective control. Doctors point to mounting evidence of inadequate financing, including yearlong waits for operations, hospitals so overcrowded that beds and obsolete equipment jam hallways. Most visibly, the physicians ... complain that they are not paid enough and have gone on strike in several provinces to demand higher fee scales. And patients are increasingly asked to pay amounts above the insured fee, a contradiction to the system's founding philosophy.

At issue, analysts say, is the whole public nature of the system and how much of a new or expanded role, if any, private enterprise should play. ''We have a great chance of losing our health system the way we know it,'' said Ginette Rodger, executive director of the Canadian Nurses Association.

The Canadian health system is really nothing more than an insurance plan for all citizens. The Federal Government and each of the 10 provincial governments put up the money, which comes from income taxes, sales taxes and, in the case of three provinces, premiums. Doctors bill the province for medical services. The theory behind the system is that the healthy, not the sick, should pay for medicine.

Differences From U.S.

Canada's public monopolization of medical insurance, and the guarantee of medical care to all, are the chief differences from the United States, where Government-financed health programs are limited to veterans, the elderly and the poor. Most analysts agree that national health insurance has been a dead letter in Washington for nearly a decade. There have been new expressions of interest in recent months, however, because 10 million Americans have lost health coverage since 1981 as a result of losing their jobs.

The relevance of Canada's health system to Americans appears to be its success in providing what analysts and doctors generally agree is good care for less money. Canada spends roughly 8 percent of its gross national product for medical services, as against the United States' 10 percent. If the United States could reduce its proportion to 8 percent, the saving would be about $60 billion. Analysts say much of Canada's lower cost stems from the absence of a complex maze of private insurers who have to earn a profit to stay in business.

''Almost nobody thinks that for our 10 percent we're getting value for our money,'' said Theodore Marmor, a professor of political science at Yale who has extensively studied the Canadian health apparatus. ''In Canada, some do, some don't.''

National Approach

Health as a political issue is coming to a head in Canada with the recent introduction in the national legislature of a bill proposed by the Government of Prime Minister Pierre Elliott Trudeau. Called the Canada Health Act, it would consolidate most existing programs. More important, it would limit doctors' ability to charge more than the insurance rates. The proposal has met strong response:

''We're going to be in for a dog-eat-dog confrontation,'' said Dr. Marc Baltzan, president of the Canadian Medical Association. But in pointing out that the system is now badly underfinanced, the medical association says lives are already being jeopardized. ''And as people die on waiting lists, governments are going to catch the heat,'' says Dr. Baltzan. They point to South Saskatchewan Hospital in Regina where 45 patients considered ''urgent'' candidates for open-heart surgery faced six-month waits; to patients with chest pains who would normally be treated immediately but who have been turned away from Western Regional Medical Centre in Yarmouth, Nova Scotia, because the halls are already crowded with patients on stretchers, and to Moncton Hospital in New Brunswick, where 30 beds are kept empty to save costs, despite a surgical waiting list of 1,400 patients.

Doctors Feel Underpaid

The doctors' position is that such failings indicate governments' unwillingness to pay enough for hospital maintenance, expansion and improvements, not to mention their fees. More and more doctors, particularly specialists who feel they are not being adequately reimbursed, are charging patients directly for amounts in excess of those set by provinces.

Strikes have been another response. Over the last two years, physicians have struck in British Columbia, Alberta, Newfoundland, Ontario, Quebec and Manitoba. In almost all, the settlement was more generous than the government's original offer.

''Certainly we have a cheap system,'' Dr. Baltzan said. ''The question is can you afford to run a system at that level for ever and ever.''

Opponents counter that the doctors' real concern is their own incomes. As the number of physicians increased, the number of Canadians served by each declined, to 535 in 1981 from 808 in 1962, and the trend appears to be continuing. The dwindling ratio of patients to doctors makes it hard to increasing income by treating more patients, giving the doctors a powerful impetus for charging more per patient.

Threat to System Seen

The principal complaint against the extra charges, which so far make up less than 5 percent of total billings, is that they will gradually erode the public nature of health financing, a criticism also levied against the supplemental charges hospitals assess for private rooms and food. Some critics see a two-tier health system coming, one for the rich and one for the poor.

Despite the crowded hospitals, many in Canada believe the health system is financed adequately. They say the problem is that too many people are in hospitals who have no business there; that many medical problems could be treated at lower cost by nurses and other professionals rather than by doctors, who are the only individuals now reimbursed; that doctors spend too much money on fancy new equipment whose value has not yet been proven, and that doctors and hospitals have no intrinsic interest in controlling costs.

These assertions are often made by liberal economists. Robert G. Evans, one of Canada's most influential health economists, argues that a financial crisis is almost inevitable in a system under which physicians basically control how much billing will occur. Each province only controls the budgeting of overall hospital expenditures and the setting of a fee scale used to reimburse the independent doctors.

''We are now experiencing the consequences built into the way we designed our system,'' Mr. Evans said. ''We presupposed the discretionary decision by physicians wouldn't break the bank.''

Mr. Evans says the answer lies in more research to learn which proven medical methods are least costly. He argues that provinces should be told to find such cost-saving measures and then to require the medical profession to adopt them. ''Where's the evidence that what an individual doctor determines is necessary is really necessary?'' he asked.

Doctors Prefer Independence

Physicians counter that such proposals strike at the core of their professional integrity. The more independence they are granted, they say, the healthier their patients will be. As a result, they tend to reject the very idea of economic analysis as unsuited to their basic mission.

''Most people would be very reluctant to take the position that their being alive rather than dead constitutes a marginal benefit,'' Dr. Baltzan said.

The medical profession has proposed that the poor receive free medical care, while more prosperous patients pay more. That plan would answer the question of accessibility, but would not erase fears of the two-tiered medical system.

The question of health insurance reform is further complicated by the perennial issue of Federal-provincial conflicts. Although grateful for the Federal money that pays about half the cost of health care, the provinces jealously cling to their autonomy over health matters, particularly while budgets are strapped by the recession. The fact that the Liberal Party rules nationally but does not control a single provincial legislature makes matters even more acrimonious.

Despite all the criticism and pressures for change, a recent Gallup poll indicated that four-fifths of all Canadians are satisfied with their medical insurance plan. Doctors and hospitals, although they want more money for their services, generally do not want to scrap the system. One of its virtues, they say, is that they do not have the problem American doctor's problem of trying to collect from people who will not pay their bills.

''You'll never persuade the Canadian people to go back,'' to free enterprise medicine, Mr. Douglas said. ''They wouldn't stand for it.''

"Who Is Killing America's Millionaires?"

Sneaking in a quick post between new student advising appointments, does recent evidence support that claim that wealthy individuals have been fleeing high tax jurisdictions?:

Who Is Killing America's Millionaires?, by Daniel Gross, Slate: It hasn't been a good recession for the rich. The ... boom was extraordinarily top-heavy..., these are tough times for the wealthy.

As if market forces and malevolent actors weren't enough, the rich are now finding themselves targeted by politicians. Strapped for cash, states, cities, and the federal government are seeking to soak the rich—or at least to make them pay taxes at the same marginal rates as they did in the Reagan years, which many on the right regard as an act equivalent to executing landed gentry. Some politicians have even suggested that we fund health care by slapping a surtax on people with annual incomes of more than $1 million.

This tactic isn't likely to work, in large part because people who make a lot of money are quite effective at swaying public policy. What's more, the wealthy have many defenders who argue that taxing the golden geese will cause them to fly away. In May, the Wall Street Journal op-ed page argued that millionaires fled Maryland after the state legislature boosted the top marginal state income tax rate to 6.25 percent on the top 0.3 percent of filers. ... The Journal uses this ... to warn the federal government and states with progressive tax structures and lots of rich people—New York, New Jersey, California—to heed the lesson. Tax the wealthy too much, and they'll leave.

Such logic makes sense to the Journal's op-ed page staffers, who inhabit an alternative universe in which people wake up in the morning and decide whether to go to work, innovate, or buy a bagel based on marginal tax rates. But if people were motivated to choose residences based solely on high state income taxes, then California and New York wouldn't have any wealthy entrepreneurs, venture capitalists, or investment bankers—and the several states that have no state income tax, which include South Dakota, Alaska, and Wyoming, would be really crowded with rich people. Maybe Maryland's rich folks just had a crappy year in 2008. Robert Frank..., citing data from the Institute on Taxation and Economic Policy, that there's "evidence that [the state's] millionaires didn't disappear because they moved, they disappeared because they are no longer millionaires." ...

Consulting firm CapGemini conducts an annual census of high-net-worth individuals, defined as people with at least $1 million in investable assets, excluding primary residences. "We've been doing this report for 13 years and haven't seen this kind of loss of wealth since we started," said Ileana van der Linde ... at CapGemini... North America saw an 18.5 percent decline in its high-net-worth population, from 3.02 million in 2007 to 2.46 million in 2008. ...

CapGemini's survey contains some interesting geographic wrinkles. High-tax areas like New York and California—places where politicians have been talking about potentially raising taxes on the rich to deal with budget crises—held up better than the national average. ...

Comparative tax havens like Florida, Nevada, and Arizona didn't see an influx of millionaires in 2008. Far from it. In 2008, Las Vegas lost 38 percent of its HNWIs, and Phoenix lost 34 percent. Florida, which has no state income tax and hasn't been talking about one, was a killing field for the rich. The three major metro areas that lost more than 40 percent of millionaires in 2008 were all in no-income-tax Florida—Orlando (42 percent), Miami (42 percent), and Tampa (51 percent). The decline has nothing to do with taxes and everything to do with bursting asset bubbles. ...

Of course, there's evidence that some millionaires have moved out of high-tax states. Bernie Madoff, for example, recently left New York to take up residence in North Carolina.

Paul Krugman: Costs and Compassion

Controlling costs is essential if we want to guarantee health care for all:

Costs and Compassion, by Paul Krugman, Commentary, NY Times: The talking heads on cable TV panned President Obama's Wednesday press conference. You see, he didn't offer a lot of folksy anecdotes.

Shame on them. The health care system is in crisis. The fate of America's middle class hangs in the balance. And there on our TVs was a president with an impressive command of the issues... Mr. Obama was especially good when he talked about controlling medical costs. And there's a crucial lesson there — namely, that when it comes to reforming health care, compassion and cost-effectiveness go hand in hand. ...

President Obama is trying to provide every American with access to health insurance — and he's also doing more to control health care costs than any previous president.

I don't know how many people understand the significance of Mr. Obama's proposal to give MedPAC, the expert advisory board to Medicare, real power. But it's a major step toward reducing the useless spending — the proliferation of procedures with no medical benefits — that bloats American health care costs.

And both the Obama administration and Congressional Democrats have also been emphasizing the importance of "comparative effectiveness research" — seeing which medical procedures actually work. ...

Many health care experts believe that one main reason we spend far more on health than any other advanced nation, without better health outcomes, is the fee-for-service system in which hospitals and doctors are paid for procedures, not results. As the president said Wednesday, this creates an incentive for health providers to do more tests, more operations, and so on, whether or not these procedures actually help patients.

So where in America is there serious consideration of moving away from fee-for-service to a more comprehensive, integrated approach to health care? The answer is: Massachusetts — which introduced a health-care plan three years ago that was, in some respects, a dress rehearsal for national health reform, and is now looking for ways to help control costs.

Why does meaningful action on medical costs go along with compassion? ... When health insurance premiums doubled during the Bush years, our health care system "controlled costs" by dropping coverage for many workers — but as far as the Bush administration was concerned, that wasn't a problem. If you believe in universal coverage, on the other hand, it is a problem, and demands a solution.

I'd suggest that would-be health reformers won't have the moral authority to confront our system's inefficiency unless they're also prepared to end its cruelty. If President Bush had tried to rein in Medicare spending, he would have been accused, with considerable justice, of cutting benefits so that he could give the wealthy even more tax cuts. President Obama, by contrast, can link Medicare reform with the goal of protecting less fortunate Americans and making the middle class more secure.

As a practical, political matter, then, controlling health care costs and expanding health care access aren't opposing alternatives — you have to do both, or neither.

At one point in his remarks Mr. Obama talked about a red pill and a blue pill. I suspect, though I'm not sure, that he was alluding to the scene in the movie "The Matrix" in which one pill brings ignorance and the other knowledge.

Well, in the case of health care, one pill means continuing on our current path — a path along which health care premiums will continue to soar, the number of uninsured Americans will skyrocket and Medicare costs will break the federal budget. The other pill means reforming our system, guaranteeing health care for all Americans at the same time we make medicine more cost-effective.

Which pill would you choose?

Fed Watch: The Debate Continues

Tim Duy looks at the shape of things to come:

The Debate Continues, by Tim Duy: The debate over the shape of the recovery continues unabated. Equities, at least this week, are voting in favor of the V-shaped recovery, with the Dow pushing past the 9,000 mark for the first time since January. Never one to accept good news at face value, Nouriel Roubini predictably took the opposite position:

A "perfect storm" of fiscal deficits, rising bond yields, "soaring" oil prices, weak profits and a stagnant labor market could "blow the recovering world economy back into a double-dip recession," he wrote in a research note today. "It is getting more likely unless a clear exit strategy from the massive monetary and fiscal stimulus is outlined even before it is implemented."

Roubini, chairman of Roubini Global Economics and a professor at NYU's Stern School of Business, predicted that the global economy will begin recovering near the end of 2009. The U.S. economy is likely to grow about 1 percent in the next two years, less than the 3 percent "trend," he said.

Roubini based his short-term outlook on the worsening condition of the U.S. housing and labor markets, which he called "inextricably linked." He said a "weak" job market will contribute to another 13 percent to 18 percent drop in house prices, bringing total declines nationally to as much as 45 percent from their peak.

I would add to Roubini's pessimism that bond market investors as of yet do not share the optimism of their brethren in the equity side of the industry. The run up in yields that brought a 4-handle to the 10 year Treasury appears to have been stopped dead in its tracks, and that maturity has pulled back to the mid threes. If the run-up in yields foreshadowed a burst of optimism in equities, the pull back would suggest that this rally has nearly run its course.

The challenge here is two-fold. The first challenge is to determine how much of the recent equity run is attributable to the weight of evidence that indicates the worst of the downturn is behind us. With the Armageddon trade off the table, some gains were inevitable, just as was the rise in Treasury yields. The more difficult challenge is the strength and pattern of the subsequent recovery. To be sure, one should not ignore the possibility of a blowout quarter here and there, as GDP data can bounce quickly to bounces in underlying data such as a stabilization in auto sales. But will such a bounce reflect fundamental underlying strength? A slow, jobless recovery - my dominant scenario - would most likely produce the seesaw trading we saw in the wake of the tech bubble crash, a pattern that held until the housing bubble gained full traction. Such an outcome looks consistent with the sentiment of Federal Reserve Chairman Ben Bernanke in this weeks Congressional testimony:

Despite these positive signs, the rate of job loss remains high and the unemployment rate has continued its steep rise. Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending. The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook.

Later, during questioning, Bernanke reiterated:

What will the recovery look like? Slow. "The American consumer is not going to be the source of a global boom by any means," Bernanke says.

Sounds like he tends toward the low end of the FOMC's range of forecasts, and suggests, talk of withdrawal of various monetary accommodation aside, this looks like a reasonable forecast:

BlackRock Inc., the biggest publicly traded U.S. money manager, recommends buying Treasuries maturing in two to five years on expectations the Federal Reserve won't raise interest rates this year.

"They still see potential downside risks to growth," Stuart Spodek, co-head of U.S. bonds in New York at BlackRock, said in a Bloomberg Television interview. "The Fed is not going to tighten. It has referenced keeping rates low for an extended period of time."

With unemployment rates still headed north, it is tough to see the Fed tightening within the next twelve months, if not longer. But will the job market surprise us? No clear indications can be gained from initial unemployment claims data which, although battered by unusual seasonal patterns, overall remains consistent with further drops in nonfarm payrolls. Indeed, this would be consistent with recent patterns of recession. David Altig declares:

...I'm quite sympathetic to DeLong's theme that the dynamics of U.S. labor markets coming out of recessions appear to have changed starting with the 1990–91 economic contraction. And it might be hard for many people to argue with DeLong's point that the U.S. economy is likely headed toward another so-called "jobless recovery." But until more facts are in and we're able to look back on what transpired, I think we still, at this point, must reasonably count the current run-up in the unemployment rate as a puzzle.

In the comments from my last piece, reader spencer takes a different perspective, noting that forecasters have tended to underestimate the strength of recoveries, and further notes that recent moderate recoveries have followed atypical mild recessions. The current recession, however, is more typical of the pre-1990 variety, and, as such could be expected to yield a rapid recovery. A logical analysis from a long-time observer of business cycles; as always, one should have such an outcome on their continuum of possible events, but I tend not to be particularly sympathetic to the mild recession, mild recovery, big recession, big recovery analogy. It seems to be that a cursory look at the data suggests something very different is happening in the labor market and thus the strength of recoveries since the early 1980s. Look, for example at the pattern of durable goods manufacturing payrolls:

FW0724093 Previous to 1990, durable good jobs snapped back quickly, but that began changing after the 1980 recession, first with a muted rebound, than a slow return after the 1990 recession, and then with no return after the 2000 recession. That lack of rebound alone cost the recovery roughly 2 million jobs - and it seems that if the downturn was only mild, we should have expected these jobs to return. We will lose another 2 million at least by the time the current downturn is complete. Does anyone think these jobs are coming back? Anyone?

Likewise, nondurable goods manufacturing tells an even worse story:


In previous cycles, a rapid bounce, but simply an outright cliff dive since the mid 1990s. Again, do we think this trend will be reversed in the upcoming recovery? Another, albeit smaller sector:


To be sure, information services was coming off a bubble, but stability in the sector remained elusive even at the peak of the recent cycle.

These patterns suggest to me that the last fifteen years has seen intense structural change such that even mild recessions result in permanent dislocations. I have trouble that in the midst of such ongoing structural change a deeper recession will result in a less permanent dislocation. No, I suspect many of these jobs are gone for good, placing an additional weight on the job market during the recovery. Simply put, the danger is that in even a moderate recovery, the remaining expanding sectors will lack sufficient strength to compensate for these permanent losses.

Anticipating the comments, another way some might describe the patterns in the labor markets during recent recessions is that a variety of economic policy decisions by both Democratic and Republican administrations have had the impact of dismembering the industrial base of the US without encouraging the growth of sufficient replacement jobs, thereby throwing the American middle class under the train. That, however, is such a dark interpretation, as opposed to say, cheering the efforts of policymakers to lessen the burden of work on Americans by encouraging foreign nations to forsake their own consumption to provide goods for our citizens.

Bottom Line: I am not convinced that the equity run up confirms much more than the power of low expectations. Indeed, the bond market has yet to follow suit (when I would actually expect it to lead the way). I increasingly think that the debate between V and other shaped recoveries is really a debate over the degree of structural change occurring in the economy. If you believe this is a typical cycle, and that what was demanded and how it was produced is roughly the same after as before the recession, a V-shaped recovery is your likely candidate. If you believe that the current recession is simply intensifying a period of intense structural change, than you are looking for a U or L-shaped recovery. Notably Bernanke, by acknowledging that the US consumer is in no shape to continued its 25 year role as a shaper of global economic trends, seems to be siding with the structural change side of the coin.

"All Stimulus Roads Lead to China"

Should emerging countries, China in particular, intentionally spend more on imports from the U.S.?:

All stimulus roads lead to China, by Barry Eichengreen, Commentary, Project Syndicate: Now that the "green shoots" of recovery have withered, the debate over fiscal stimulus is back with a vengeance. ... It is possible to argue the economics both ways, but the politics all point in one direction. The US Congress lacks the stomach for another stimulus package. ... A second stimulus simply is not in the cards.

If there is going to be more aggregate demand, it can come from only one place. That place is not Europe or Japan, where debts are even higher than in the US – and the demographic preconditions for servicing them less favorable. Rather, it is emerging markets like China.

The problem is that China has already done a lot to stimulate domestic demand... As a result, its stock market is frothy, and it is experiencing an alarming property boom. ... Understandably, Chinese officials worry about bubble trouble.

The obvious way to square this circle is to spend more on imports. China can purchase more industrial machinery, transport equipment, and steelmaking material, which are among its leading imports from the US. Directing spending toward imports of capital equipment would avoid overheating China's own markets, boost the economy's productive capacity (and thus its ability to grow in the future), and support demand for US, European, and Japanese products just when such support is needed most.

This strategy is not without risks. Allowing the renminbi to appreciate as a way of encouraging imports may also discourage exports, the traditional motor of Chinese growth. And lowering administrative barriers to imports might redirect more spending toward foreign goods than the authorities intend. But these are risks worth taking if China is serious about assuming a global leadership role.

The question is what China will get in return. And the answer brings us back, full circle, to ... US fiscal policy. China is worried that its more than $1tn investment in US Treasury securities will not hold its value. It wants reassurance that the US will stand behind its debts. It therefore wants to see a credible program for balancing the US budget once the recession ends.

And, tough talk notwithstanding, the Obama administration has yet to offer a credible roadmap for fiscal consolidation. ... We live in a multipolar world where neither the US nor China is large enough to exercise global economic leadership on its own. ... Only by working together can the two countries lead the world economy out of its current doldrums.

I don't think we should count on this happening.

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