The Young Doctor Has It Wrong

This post first appeared as a column in Rochester's daily newspaper the Democrat & Chronicle on Sunday, January 19, 2020.

A guest column in this newspaper by a medical student, Toby Terwilliger, makes a case for Medicare for All (M4A) – an unsubstantiated case.  He begins by referencing the high cost of medical care in the U.S. and its relatively poor outcomes.  So far, so good.  He projects current costs of $4 trillion annually will rise to $6 trillion by the end of the decade.  He declares that M4A will reduce costs by $500 million per annum, a figure he has plucked from Senator Elizabeth Warren’s website.  Unfortunately, he fails to make a case as to how those costs and outcomes might improve under M4A.  M4A will add $3 trillion to annual Medicare costs if and only if reimbursements are reduced to a level below the cost of providing the services according to an often-cited study by a former trustee of Medicare under presidents Bush and Obama.  Otherwise there would be no savings.

Mr. Terwilliger bases his conclusion about the high cost of healthcare on a simple premise that our “healthcare industry puts profits over patients.”  That’s speculative at best.  The Kaiser Family Foundation projects that annual per capita Medicare spending will increase by 5.1% compared to 4.6% for private insurance over the next decade.  Eliminating profit from the system won’t reduce costs.  It never does.  The profit motive drives efficiency and lower costs.  

This is not only true of consumer products and services but also medical procedures. In an unregulated environment, the cost of cosmetic surgery has not increased as fast as consumer prices over an 18-year period according to The American Society of Aesthetic Plastic Surgery.  Meanwhile, medical inflation drove up the cost of healthcare by 177% or more than triple the rate of overall inflation.  

A study by the non-profit North Texas Clinically Integrated Network, Inc., an Accountable Care Organization created under the auspices of the Affordable Care Act, cites eight key drivers of cost.  First among them is the “Fee For Service” (FFS) payment system which “generates a strong incentive for driving up the volume of tests and services.”  Any reform of our health insurance system that doesn’t include a shift from FFS to a value-based system will fail to address our high cost and poor outcomes.  

In a guest column I wrote for this newspaper last year, I laid out four principles essential for effective healthcare reform: (1) universal coverage, (2) reform the FFS system, (3) price competition and (4) cost-sharing.  Rolling out M4A would not address the last three of these principles and would inevitably lead to higher costs without necessarily improving outcomes.  

Mr. Terwilliger demonizes CEO’s who earn millions from the profits of the healthcare system.  But it’s doctors who have benefited most from FFS.  In the days when doctors made house calls, the automobile known as the “doctors’ car” was a Buick not a Mercedes-Benz. 

WHO WILL LEAD?

Further Future: a 21st Century Economic Model -- Part 2

This is Part 2 of 2.  To read Part 1, click HERE.

No discussion of economics can exclude current hot button topics: income inequality, free trade, immigration and the urban/rural divide.  In the aggregate, the free trade regime promoted by every administration since Nixon’s breakthrough China policy has contributed to US economic growth.  The law of comparative advantage (first defined by David Ricardo, a disciple of Adam Smith) has been demonstrated to have the desired effect.  The US advantage in professional services, global management and innovation has served us well, creating high paying jobs in urban centers – New York, Silicon Valley, Chicago, Dallas, etc.  Unfortunately, the benefits are not universally available to everyone.  Or, to put it another way, no matter how many jobs are created for international tax experts in New York, none of them are going to be filled by a worker who has lost his job in a North Carolina furniture factory.  

In his book “The Future of Capitalism,” British economist Paul Collier proposes that we change the redistribution model.  Rather than tax the rich and give to the poor, he would have us adopt an “agglomeration tax.”  Mobility is critical to economic growth.  From the time of the Pilgrims, people all over the globe have fought to immigrate into the U.S. to take advantage of the economic freedom our social contract allows.  Within the U.S., migration between regions and from rural to urban centers is an indicator of economic success.  (That’s why the European Union adopted the Schengen Agreement permitting migration across national borders.)  Our economic growth has been driven by this agglomeration, particularly in the era of free trade.  Collier points out that not everyone benefits from their move to the big city.  Demand for housing and other retail products and services renders the cost of living much higher than outlying areas.  Those whose incomes fail to rise to the level necessary to offset the higher cost suffer.  Those whose income growth outstrips the higher cost thrive – investment bankers, lawyers, Silicon Valley entrepreneurs.  Collier’s agglomeration tax would take from the latter category and pass it on to rural communities to offset the economic damage.  

At first blush, this proposal might seem to make sense.  But redistribution hinders prosperity no matter how you design the formula.  And, in any event, such a proposal would be politically infeasible. 

The key to prosperity begins with capital formation.  If you don’t have the dough in your bank account to start a business, you have to attract investors.  And, investors are attracted to the prospect of great returns.  For government to fulfill its social purpose, it must create the conditions that attract private capital.  On the whole, the U.S. does a great job of this.  Indeed, our economic prospects rely upon our ability as a nation to attract Foreign Direct Investment (FDI).  

On a smaller scale, communities can only succeed by obeying the law of attraction.  Companies are attracted to friendly regulatory and low tax environments.  This may sound to you like an “old saw” from an old conservative (and it is!).  But that doesn’t make an invalid statement.  I’ll point to two examples of small cities who have overcome the impediments to economic development.  

Chattanooga, Tennessee famously bet the farm on high speed internet in 2010.  City government recognized that the path they were on would lead to the same type of failure experienced by other small manufacturing communities.  A $330 million project -- beyond the reach of the city’s budget, funded by $111 million from the federal government with the balance coming from municipal bonds issued by the city -- enabled the city to create no-latency internet service to any and all businesses and households.  The city has thrived by attracting high tech startups to its low-cost-of-living, superior-infrastructure setting.  More recently, the Lehigh Valley region of  Pennsylvania has begun its recovery from the shuttering of its steel plants by more traditional means.  Offering tax credits and abatements and promoting development of office parks was only the beginning.  The New York Times reports that recent economic development efforts are centered on development of urban centers to attract Millennials, featuring restaurants, bars and cultural centers.  

The critical element in these two stories is local initiative.  Attracting both federal grants and private investment is the prototype for small cities to thrive.  New ventures and established companies that will create jobs and young professionals who will settle, pursue careers and raise families is the key to success.  

States like New York, lacking the wisdom and fortitude to lower taxes and reduce regulation, make the mistake of substituting government funding for private capital.  The imposition of social criteria and friction costs reduce returns and ultimately fail the communities they endeavor to help.  

Local communities can learn from the successes of Chattanooga and the Lehigh Valley and create their own economic development strategies.  Strong communities keep talent at home, promote new ventures, support established businesses, improve city schools and create programs to train the workforce and provide transportation to where the jobs are.  

New habits, creative approaches and public buy-in are challenging.  For communities to succeed, its leaders – corporate, government and non-profit – must unite behind a common vision and convince the public to support it.  It won’t be easy; but it’s got to be done.

WHO WILL LEAD?

Further Future: a 21st Century Economic Model -- Part 1

The last half of the 20^th Century bred more than a few superstar economists.  Even those who are not students of economics have heard of Milton Friedman, Paul Krugman and Paul Samuelson.  Columbia University professor of economics Mark Skousen has a different threesome in mind.  In his book “The Big Three in Economics,” he argues on behalf of three who have the most lasting effect on our economic thinking:  Adam Smith, Karl Marx and John Maynard Keynes.  That each of them lived and worked in three different centuries is no accident.  It is, rather, a measure of how long it takes for breakthrough economic theories to take root and have lasting effect on the societies that embrace them.  

While Smith (18^th Century) and Marx (19^th) might be posed as polar opposites, Keynes (20^th) proposed a blend of free enterprise and government using fiscal policy to affect economic outcomes.  (We are now more affected by the monetary theories of Milton Freidman.  But he didn’t make Skousen’s cut.) 

The NY Times profiled an economist who endeavors to have that kind of effect on the 21^st Century.  Mariana Mazzucato -- born in Italy, raised in the US and teaching in London – would like to change “how society thinks about economic value.”  Eschewing the now tired debate that frames the free market and government as opponents, she points to the Internet, GPS and the silicon chip of examples of how government research has enabled free enterprise to flourish and society to benefit.  She also suggests that the political left is “losing around the world because they focus too much on redistribution and not enough on the creation of wealth,” according to the Times.  Her theories have been embraced by politicians of both parties who declare themselves to be capitalists but want government to be more active in achieving economic outcomes.  Elizabeth Warren would double federal R&D to “Create and Defend American Jobs”.  Meanwhile, Senator Marco Rubio (R-FL) has published a treatise outlining how the federal government should steer capital to favored industries. 

It would be easy to fall into the usual tribal debate about Dr. Mazzucato’s ideas – the libertarian right vs. the socialist left.  But the dogmas of either side don’t hold up under scrutiny.  It’s hard to argue that capitalist Silicon Valley startups enabled by Wall Street money haven’t created jobs, prosperity and the follow-on effects of both.  It’s also hard to argue that government didn’t play a role as technology from both the Defense Department and NASA is at the core of all digital businesses.  (The GPS system on which we all rely is still operated by the US Air Force.)

So, the question isn’t whether government research can benefit the economy or not.  It is rather where should we draw the line?  Mazzucato, Warren and Rubio would have the federal government not only directing research dollars according to social goals they deem beneficial but also extending government investments into the (no longer) private sector.  The paradigm they propose is not without precedent.  Countries as diverse as Japan, China and the former Soviet Union have created industrial policies to guide the economy.

There is no question that government can play an active role in wealth creation.  However, Dr. Mazzucato (as well as Senators Warren and Rubio) draw the line in the wrong place.  It’s certainly true that the iPhone wouldn’t exist without silicon chips, the Internet and GPS.  It’s also certainly true the federal government would never have invented the iPhone.  So, I would stop at having government invest in companies that will bring innovative technologies to market.  There’s plenty of private capital to make that happen.

Indeed, the digital technologies brought to fruition by government agencies had no commercial purpose when they were invented.  They enabled those agencies to pursue their objectives.  Silicon chips supported the space program.  GPS supports the US military. 

By contrast, the Obama administration invested in green technology to enable private enterprise to achieve a beneficial outcome.  The creation of the Advanced Research Projects Administration – Energy (ARPA-e) under the Department of Energy was meant to mirror DARPA, the Defense Department agency at the heart of the development of digital technology.  It has granted over $1.5 billion to 580 projects.  Many of these projects were highly speculative and haven’t borne fruit.  However, a select few have attracted $1.8 billion in private sector investments. In other words, the government invested in research where the private sector wouldn’t and, much like digital technologies, the private sector has taken the results and developed products that are market ready.  The greatest successes have come from the improvement in cost and efficiency of both solar panels for power generation and battery technology for electric vehicles.  So, it can be shown that the DARPA/ARPA-e model can be translated into commercial success.  

As for its social purpose, the results are a mixed bag according to Investors’ Business Daily.  The adoption of alternative energy throughout the US has resulted in a doubling of the percentage of total energy generated from alternative sources since the turn of the century.  However, in that time, U.S. consumption of energy from fossil fuels has remained about the same according to the Congressional Research Service.  Similarly, while there has been a boom in sales of electric and hybrid vehicles, the environmental benefits have been offset by the increased sales of SUV’s, this despite powerful financial incentives to buy electrics.  So, in the case of environmental technology, it might be said that government research has contributed to a green future but those who might benefit – the voters – have undermined our success. The game’s not over, of course.  More than 40 years elapsed between the invention of the silicon chip and the creation of the iPhone.  Few would have predicted it.  So, we shall see what the future holds when the future happens.  

End of Part 1 of 2 parts