Thursday, January 15, 2009


The current SCHIP expansion recently passed by the house and now being considered by the senate is a SCHIPwreck. While the prospect of millions of poor children having increased access to health care sounds great at first glance, in actuality this proposal is a lot like sending a kayak out to rescue passengers on a sinking ship.

While SCHIP is being touted as a program to aid the poor, in actuality SCHIP is aimed more squarely at the middle class. Families with incomes below the poverty line are not eligible for SCHIP, but rather go into Medicaid. SCHIP covers families with incomes between 100% and 300% of the poverty line: Depending on which state one lives in, 300% of the poverty line implies a household income (for a 4 person household with two children) of between approximately $60,000 and $72,500. When one compares this with the US median income in 2007 of roughly $50,000, it becomes evident that the SCHIP expansion is not a program for the poor, as it has the potential to apply to well over half of all households in the US. Moreover, the SCHIP expansion explicitly prohibits states from subjecting applicants to an assets test, meaning many people who can legitimately afford health care (e.g. people living off inheritances, retired dot-com millionaires, and the like) will be eligible for SCHIP.

In addition, this piece of legislation has a nice fat pork clause in it, as pointed out by Forbes, which attempts to reduce the competition faced by hospitals by banning physicians from opening specialty hospitals. This pork is quite emblematic of one of the key underlying causes of rising health care costs--a serious lack of competition within the industry. Licensing laws severely restrict the entry of medical practicioners to provide service, leading predictably to higher prices. The morass of state-level insurance regulation makes it impossible to provide the same insurance plan in two different states, which ultimately harms consumers by depriving them of hundreds of insurance options. The safety and efficacy tests mandated by the FDA cost nearly a billion dollars per drug and can take over a decade, cutting significantly into the patent life of a drug--these huge fixed costs deter many new entrants into the pharmaceutical industry.

It is true that the health care industry needs an overhaul to help improve the access of Americans to quality care. Rather than concoct pork-laden legislation, a better route is though the liberalization of many of the highly regulated health-related markets.

Monday, January 12, 2009

Sachs on "The Case for Bigger Government"

Over in TIME, Jeff Sachs argues that the time has come for the US to go Euro and fully embrace high taxes and large governments. In his parting statement, he argues that "Obama's long-term success will depend on his ability to lead Americans to a new, even revolutionary consensus that the U.S. government can offer value for money." Most people, even those on the libertarian fringe of the libertarian movement, are probably willing to accept larger government and increased taxes if the government can indeed "offer value for money." The fundamental nature of government, however, is that this goal will always be elusory.

The nature of private production is quite simple. Entrepreneurs put their own assets at risk in an attempt to create a product that people want. If they are correct, and the product they create is a hit, then they will reap profits. Why? Because the product they have created has offered value for money. If they are incorrect, and their product flops, they will lose money. In this case, they have not offered value for money. Absent $700B bailouts, there is no opportunity to pass the buck and make someone else bear the losses. This continual process of earning profits and realizing losses send feedback to the entrepreneur that informs their production decisions. In the private sector, value for money is the norm, because the entrepreneur only gets paid if consumers like their product, and entrepreneurs making products consumers do not like are weeded out of the market.

In the public sector, these mechanisms simply cannot work. Politicians, and especially the bureaucrats who implement the selected policies, have very few assets staked in any project. At best they have their reputations to worry about, and opportunities to pass the buck (i.e. blame the othe party) for bad outcomes abound. At the same time, private citizens do not have the option not to purchase the product being offered if they do not like it. They have the option not to use it, but are compelled under threat of criminal prosecution to pay for it nonetheless. The combination of these elements means that the feedback mechanisms present in the private sector that tend to lead to value for money are significantly weaker, if not conspicuously absent, in the public sector.