Busting the Medicare Myths – Presentation

I gave a presentation today to the Michigan Intergenerational Network at Madonna University on the economic prospects of Medicare (U.S.). Thanks to the Madonna Univ. Gerontology Department for support and assistance.

For a downloadable and viewable copy of the presentation, see:  https://jimluke.com/course-resources/presentations/busting-myths-about-medicare/.

Markets Don’t Work For Health Insurance Because There’s Not Enough Competition

I’m currently researching for a presentation on Medicare.  Along the way, I found this post by Garth Brazelton at Reviving Economics:

My big concern is something that has been known since the beginning and that is, Obamacare does nothing to erode the existing monopolies of health insurance in many states.  The biggest issue with Obamacare in my view remains the fact that the so-called marketplace doesn’t really create a true market.  The fact is, plans cannot be bought and sold across jurisdictional lines.  Obamacare may actually serve to simply consolidate monopoly or oligopoly power – which may in fact keep prices higher than they otherwise should be.   The ironic thing is that we probably would be better off if the government just created its own monopoly power and moved us to a single-payer system.   That way, the government could have more control over prices.  Under this private monopoly system though, that can’t happen.

The Affordable Care Act (the so-called Obamacare) effort makes many improvements that are and will continue to help the U.S. get healthcare spending under control. But it won’t get us down to spending levels all other industrialized countries achieve (with better outcomes) largely because it relies on private insurance companies exclusively for under-age-65’s.

Conservative critics like to claim markets work wonders and achieve efficient outcomes.  That’s only true when there are competitive markets, full and symmetric information about the product/services, free entry, and transactions are discreet and not long-term relationship based.  Healthcare fails all of these.  As Brazelton points out, competition is seriously missing at the appropriate market level – the consumer.  As for the other requirements for markets to succeed in healthcare, Kenneth Arrow explained why that doesn’t and can’t happen fifty years ago in this seminal paper.

Instead of trying to dismantle the Affordable Care Act and move towards more so-called “free market” system, we should be moving toward a single-payor insurance system (like Canada) or at least toward providing a public-option so private insurance companies have a real competitor.

Employment Is Likely to Improve – Morale Improves When the Beatings Stop

Recovery from the employment losses suffered in the Great Recession (worker’s depression?) of 2007-2009 has been excruciatingly slow.  As I write this post in November 2013, total employment in the U.S. is still more than 1% fewer jobs than when we started this mess 5 years and 10 months ago. That’s 976,000 jobs still missing when compared to 6 years ago. Bill McBride at CalculatedRisk has been tracking this slow recovery of employment and compares it to previous (post-WWII) recessions in this graph.  Typically, we recover from a recession and re-gain the lost jobs in two years or less (2001 is the only other exception).  

Percent Job Losses in Post WWII Recessions

There are several reasons why this recovery has been so slow compared to others. The losses were deeper than the others, a financial crisis recovers slower, and households were deeply in debt which slowed recovery in spending.  But government policy is one of the most significant causes of the slow recovery.  

One of the lessons of all those earlier fast-recovery recessions is that counter-cyclical fiscal policy and automatic stabilizers work.  Yes, there are technical problems in implementing discretionary fiscal policy such as how big, when to do it, and whether to use tax- vs. spending-based policy changes. But it works -especially when the economy has a lot of slack and the recession is deep and severe.

The concept is actually very simple – if consumption spending (C) and investment spending (I) are declining, then the government needs to step in and increase its economic stimulus either by spending more and reducing taxes on those who spend.

Another lesson of those earlier recessions is that automatic stabilizers work very, very well.  Automatic stabilizers are programs like unemployment compensation, SNAP and welfare assistance, and the progressive income tax system.  The problem is that counter-cyclical fiscal policy is largely the responsibility of the national government since only the national government has the freedom to run large deficits when it’s needed.  State and local governments are constrained to run balanced budgets every year and they don’t have the sovereign power of the currency like the national government.

State and Local Government Payroll Employment

This requirement of state and local governments to always run balanced budgets means that state and local governments make recessions worse and recoveries slower. Instead of being counter-cyclical, state and local governments are pro-cyclical.  Again, Bill McBride of CalculatedRisk helps us visualize how state and local governments helped make the recovery slower.

In earlier recessions the national government would step up and offer stimulus to both offset the declines in private spending and private demand, but help fund state and local government to prevent state and local government layoffs.  That didn’t happen this time.  The national government stimulus was too small for too short of time. What’s worse, the national obsession with the deficit has led to premature austerity policies at the national level.  The result was state and local governments, instead of helping the economy recover, were effectively beating the economy for not being more robust.

The good news, though, is that state and local governments appear to finally be done beating the economy into submission.  State and local austerity is coming to an end according to the data. As McBride notes, state and local government employment rose by 74,000 in October 2013.

If this continues and state and local governments are starting to hire teachers, firefighters, and police instead of laying them off, then we will likely come closer to finally recovering all the job losses from the recession by spring 2014 instead of spring 2015.  Not surprisingly, once the beatings stop, morale actually improves.