Socialism and Capitalism Can Work Together

A major objection to the Obama's administrations public option in the health care reform debate is that a public option is socialized medicine and will take the US down the road to a socialist society similar to the former Soviet Union.

Socialism by definition is the ownership and administration of a business activity. Socialism is not necessarily something to be feared and the US currently has a significant part of its economy operating under socialism. Most of our roads, our military, most of our schools, the weather service, etc. are socialized in that they are owned and operated by the government. Capitalism even requires that some services be provided as socialized services. The economist F. A. Hayek who is a champion of capitalism and is frequently quoted by conservative commentators such as Larry Kudlow said that in cases where restrictions and regulations apply to all, capitalism does not argue against central control such as in the areas of food safety or working hours and that capitalism is not incompatible with the provision of social services. In general, Hayek says that legitimate areas of state control are where the payment of a price is ineffective such as most roads or where the cost of harmful effects of competition can not be confined to the owner that state regulation is required. Hayek specifically makes the case that the state is responsible for developing regulations that limit the negative impact of pollution and deforestation.

The public option being discussed by the Obama administration would not be a business owned or operated by the government and therefor would not be socialist. Britain has socialized medicine in that the hospitals are owned by the government and the doctors are employees of the government. The public option being advocated by the Obama administration would not be socialized medicine in that the doctors, hospitals, pharmacies, etc. would remain private businesses. The public option would pay medical bills for its policyholders with money collected in the form of premiums from its policyholders. The public option would be governed by an independent board of directors working under the same state and federal regulations that private insurers work under and would therefor be similar to the US Post Office (USPS). Like the USPS, the public option would compete for business with privately owned competitors. The only real differences are that like the USPS, a public option would not be operated for profit, would not need to pay some of the money collected in premiums to shareholders, would not use premiums to pay sky high salaries or to fund mergers and acquisitions. Keep in mind that some of the existing private insurers such as Blue Cross are not-for-profit firms owned by their policyholders. Also, it appears that some people who object to the public option do not make a distinction between the terms public option and single payer. Every private health insurer is a single payer mini-system. In the case of my Blue Cross insurance, all of my medical bills (after the considerable calendar year deductible) are paid by Blue Cross.

Although there may be many good arguments against the proposed public option, a claim that the public option is taking us down the road to communism is not a valid argument.

What is Palin Planning?

Palin has resigned prior to the end of her first term as Governor of Alaska and has not explained why she resigned early or what her future plans are. I think that her resignation is the first step in her plan to run for president in 2012. By resigning now, she is able to campaign for Republicans in the 2010 mid-term elections without risking ethics charges as she would expose herself to if she were still Governor of Alaska. She commands support from the extreme right wing fringe who make up for what they lack in numbers with enthusiasm which she will be able to direct to the candidates she supports. By campaigning in the mid-term elections, she will pocket political IOU's and have some influence on the platforms of the candidates she supports. Given her animosity to the media, she will not announce that she is planning to run for president in 2012 until the early 2012 so as to limit media coverage of her activities. Given that primaries are usually decided by the most extreme supporters of both political parties, she stands a good chance of winning the Republican Primary although there is almost no chance that she would be able to win the general election. She will use the next few years to build her base and collect the IOU's that she will call in during the primaries as well as to earn money for her personal needs. Unfortunately, she won't use the time to become better versed on the issues as I expect that she believes that everything she needs to know is in the bible or written between the lines of Obama administration policy. Her between the lines reading of the current administration's policy results in pure fiction and her supporters believe it with a passion. Obama is not a citizen, health care reform will lead to the euthanization of the elderly and feeble, Obama is a Moslem and other beliefs are all clearly a fiction but Palin's supporters accept them as fact without reservation. I'm sure that the policies which will result from the Obama administration's first term which will include some flavor of health care reform, some immigration reform which will probably include a path to citizenship for some illegal immigrants and probably at least one court case that limits gun ownership will provide more than enough incentive to get Palin's supporters to actively support her.

The 2012 presidential elections will be the ugliest that we have ever seen but the election of Palin as the Republican candidate will be a gift to Obama which will make it almost impossible for him to loose re-election.

Benjamin Franklin Deserves More Credit

George Washington is frequently referred to as the father of our country having served as the Commander of the Continental Army in the War of Independence and as the First US President. It was George Washington's wisdom that shaped the form of government in the US and arguably ensured that the new nation survived the birth. He was instrumental in establishing the balance of power between Congress and the Executive branch refusing to making significant decisions without the participation of Congress. He refused to accept a 3rd term as president and assiduously avoided imbuing the presidency with the trappings of a monarchy most famously instructing those he came in contact with to refer to him as Mr. President rather than as 'Your Highness' as many were inclined to do so. He set the tone and the rest is, as we say history.

Benjamin Franklin was instrumental in forging a consensus in the drafting of the US Constitution and without him, if less wise and hotter heads had prevailed, it is unlikely that the Constitution would ever have been finished at least in the form that has proven so robust over the centuries. In addition to guiding the development of the US Constitution, we have Franklin to thank for establishing much of the infrastructure that would serve is so well of the centuries. Franklin established the first public lending library, the first fire department and what would become the US Post Office.

However, there are perhaps more important accomplishments to credit to Franklin. Arguably, Benjamin Franklin deserves as much if not more credit than George Washington for the military success against the British without which the US would never have been born. I am comfortable in saying that without Franklin's contribution, the US would have lost the War of Independence with the British and remained a colony.

Benjamin Franklin is almost solely responsible for arranging the support of France for the War of Independence. Without the support of France, the US would almost have certainly lost the war. Over a period of about 2 years, Franklin used his considerable skills of planning, communication, argument and leveraging his rock star like status in France to win French support. In the 18th century, scientists were accorded the fame that rock stars and performers are now accorded. Franklin was known as the "man who tamed lightening" for his experiments with electricity and kites with which every schoolchild is familiar with and the development of lightening rods which saved many buildings from lightening damage.

The support of France was essential to the winning of the war. The Battle of Yorktown was the decisive and last major battle of the War of Independence after which the British withdrew from America. It was a French General who persuaded Washington not to attack the heavily fortified New York City but rather to attack the British in Yorktown. During the battle, there were almost as many professional French soldiers attacking Yorktown as there were militia under Washington. 90% of the gunpowder and many of the weapons used in the Battle of Yorktown were supplied by the French as the US did not have a military manufacturing capability at the time. It was the French Fleet that prevented the British fleet which was en route to Yorktown to relieve the British with supplies, additional troops and to provide naval artillery support. The consequence of the French support was that the US won and defeated Cornwallis taking about 8,000 British prisoners as well as significant quantities of British military equipment and supplies.

Without Franklin and the support of France that he had arranged, the US could not have won the war. We repaid our debt to the French people with the liberation of France from Germany during World War II but we still owe a dept of gratitude to Franklin that is generally not recognized much less expressed.

Medical Insurance - $14 Million for 1 Salaried Doctor

I have medical insurance through Blue Cross and I have read my policy and I always review the benefit statements for medical services processed on my insurance. A few months ago I had a routine screening colonoscopy because of my age and everything was fine until I received the bills.

Since I have a private policy, i.e. not a group policy, I have a fairly high calendar year deductible. However, I was aware that my policy pays 100% of the allowed charges for a screening colonocsopy every 10 years which is to say that Blue Cross waives the calendar year deductible and should pay everything. The allowed charge is the price that Blue Cross negotiates as payment in full with a service provider.

When I received my benefit statement, I noticed that there were two charges for anesthesia - one with a list price of $602 and an allowed charge of $133 and the the second with a list price of $595 and an allowed charge of $133. Thinking this was a billing error and a duplicate charge, I called the doctor's office who explained that the $602 charge was for an anesthesiologist who prescribed the anesthesia and was available in case there was a problem, the second charge was for the anesthesia nurse who actually administered the anesthesia and monitored my vitals and that I was only charged for the actual time that they spent with me which was 22 minutes. First, I spent about 3 minutes with the anesthesiologist who asked my weight, whether I had any allergies and then presumably wrote the prescription for the anesthesia. Based on the number of procedure rooms, I would estimate that this anesthesiologist supervises 6 anesthesia nurses. One of my 1st thoughts was how could the anesthesiologist accept such a significant discount for Blue Cross patients? But then I did the numbers. Assuming that the anesthesiologist works 50 weeks per year, 8 hours per day, supervises 6 anesthesia nurses who each perform 2 colonoscopies per hour, then the total annual billing for her services at $602 per procedure would be $14.4 million! Even at the lower negotiated rate of $133 per procedure, the total annual billing would be $3.2 million. Note that there was also a facility charge at $1,295 and the doctor who performed the procedure billed separately. $14.4 million per year in charges for 1 doctor's time is outrageous. For the anesthesia nurse, using the same assumptions, the total annual billing would be at least $2.4 million at the list price or $532K at the Blue Cross price. I know that nurses are paid well but again this is ridiculous.

Getting back to the benefit of knowing what is in your policy, as I explained above, per my policy I was only responsible for the allowed charges (not the list price) and Blue Cross waived the deductible for this procedure so I was surprised that I received a $250 bill for the Outpatient Surgery Center where the procedure was performed and another bill for $200 for the doctor who performed the procedure. After a number of questions, it turned out that the doctor coded the Blue Cross claim incorrectly, he corrected the claim and Blue Cross paid him the additional amount that he had billed me for. The 1st Blue Cross claims representative said that the Outpatient Surgery Center charges were not part of the Colonoscopy and that I was responsible for the $250 co-pay. I called back again, spoke to another rep who agreed with me and setup the paperwork to refund the $250 co-pay that I had already paid. If I hadn't read my policy I would have paid $450 more so reading the policy was time well spent.

Larry Kudlow - Soap Box Jockey

Although there many TV commentators that I disagree with, Larry Kudlow is one of the few that cause me to change the channel when I encounter him. I don’t know why he even bothers having guest specialists and commentators on his CNBC show that disagree with him because he usually treats the show as his personal soap box, interrupts constantly, talks over everyone else, and is generally rude and trite. Rather than educated economic analysis, he is prone to trite summary judgments and is constantly applying juvenile labels such as “bubble head” or “Bailout nation” and is constantly shouting warnings that the US is headed towards socialism. He has never encountered a tax or government regulation that he supported and constantly cites unbridled capitalism as the cure for every economic situation. Larry "buy more stock" Kudlow doesn't seem to realize that Capitalism is a system in which capital is only one of the input factors and requires other inputs such as an educated labor force, an efficient infrastructure, etc. to work well. He responds viscerally to any suggestion that the stock market is overbought or that investors should stop buying stocks calling anyone with a message of caution a 'doom monger".

His economic analysis, when he even bothers to refer to some economic principle, is almost always wrong. He doesn't seem to recognize that the economic landscape has changed over the last 200 years from an economy based on agriculture and trade primarily in commodities and low value added manufactured goods. In 2007, he belittled anyone who suggested that we were heading towards a recession and up to mid 2008 denied that the US was in a recession. In June 2002, he actively argued for the US to invade Iraq in order to help the stock market arguing that “a lack of decisive follow-through in the global war on terrorism is the single biggest problem facing the stock market”. There are a number of justifications for putting the life of soldiers on the line but keeping the DOW index high is not one of them. He has without exception supported every Bush era economic policy without reservation. Mr. Kudlow’s economic philosophy is essentially classical economics which has consistently proven to be too limited of a theory to be of any value to planning economic policy. One of his favorite economists is Friedrich von Hayek who he cites often to support his contention that current government policy will lead the US to socialism. Mr. Kudlow is a conservative while Hayek, using contemporary terminology, is a libertarian and would have argued equally strongly against Mr. Kudlow’s economic prescriptions as he would against current Democratic policies. Ironically, Hayek says that regulation by the state is required in areas where the payment of a price is inefficient such as with most roads or where the cost of harmful effects of competition can not be confined to the owner such as air pollution. Kudlow would use Hayek to argue against Cap and Trade legislation while Mr. Kudlow’s hero Hayek would have said that such legislation was indeed the responsibility of the state.

I really don’t understand how Mr. Kudlow has been able to acquire such high level positions including the head economist for Bear Stearns (from which he was fired for substance abuse) and numerous high level government positions with only a BA in Economics. If you want unbiased business and economic analysis based on sound economic reasoning then I would suggest that you look elsewhere.

Health Care Reform - Myths and Disguises

It is difficult enough to evaluate such a complex issue as health care reform without the misinformation that is beginning to flood the media. Following are some of the most significant claims, myths and intentional misdirection that I have recently noticed.

• A number of US Senators and Representatives have been stating that if a public option is part of the health care reform, “About 88.1 million workers would see their current private, employer-sponsored health plan go away and would be shifted to the public plan”. They attribute this conclusion to a report from the Lewin Group which is characterized as a research firm. What they don't tell you is that the Lewin Group is owned by a company named Informix which is a wholly owned subsidiary of the United Health Group. United Health is a major health care insurer in the US with about 27 million policy holders which might be negatively impacted by a public option. I doubt that United Health can be relied upon for an unbiased opinion.
• You may have seen the TV commercial or web site from a group called Americans Against Food Taxes which claims to be a coalition of concerned citizens. The commercial and web site argue against imposing a tax on soda and juice drinks which has been discussed as one way to fund health care reform.The web site and commercials have been developed by Goddard Claussen which is a public relations firm that advocates for anyone who pays them. This ad campaign is being financed by the American Beverage Association rather than a coalition of concerned citizens. The group claims that “taxes never made anyone healthy”. Oh really? Wasn’t this the argument that was made to justify additional taxes on tobacco, i.e., that higher cigarette prices would cause people to stop smoking thereby making them healthier? Another argument made to justify higher tobacco taxes was that the taxes would help fund the additional health care costs attributable to smoking related diseases. Soda, fruit drinks, candy and similar foods have contributed significantly to the explosion in rates of obesity, type 2 diabetes, heart disease, etc. that are chronic life long diseases which cost significantly more in terms of health care than smoking related diseases which typically develop in old age.
• The claim has been made that a public option will pay medical providers the same low rates as Medicare does which will put them out of business. Yes, Medicare typically but not always does reimburse at a lower rate than private insurers. However, when you consider that Medicare is designed to only reimburse 80% with the remaining 20% coming from the patient’s secondary insurance or patient’s pocket, Medicare patients in total frequently reimburse more than private insurance.
• The claim has been made that if a public payer option is included in health care reform that administrators in Washington will determine what medical services you can get and limit your options. However, with a private insurer, an administrator with the carrier will determine what care you can get and private insurers who are motivated by profit margins are more restrictive than Medicare. Dr. David Scheiner, a Chicago-based doctor who was Obama’s primary care doctor before he became president, said that Medicare is not restrictive enough and permits almost anything while he constantly battles with private insurers to authorize medically necessary treatments.

There will continue to be dire claims made on both sides of the debate and it will be difficult to sort accurate information from misinformation. Hopefully, each of us will take a few minutes to check the accuracy of the most significant claims before making a decision on the issue.

Cash for Clunkers Program Benefits

Although most commentators have commended the Cash for Clunkers program, there have been a few notable exceptions such as John McCain who is threatening to filibuster the extension of the program in the US Senate. The acclaim for the program has been in general terms and, since I haven't seen the program benefits quantified, below is my estimate of what the program actually will deliver. You can download the spread sheet used to calculate the benefits and modify the assumptions if you like. The benefits below are based on the initial program funding of $1 billion and you should triple the benefits if the $2b extension is passed by the US Congress.

SUMMARY OF BENEFITS (Remember to triple #'s if program extension passes)

1. Since the US consumes 20 million barrels of oil per DAY, a savings of 1.6 to 3.6 million barrels of oil per YEAR will not significantly reduce dependence on foreign energy imports.
2. The program will generate a one time benefit of about $250 million in increased tax revenues to financially strapped state and local governments.
3. The program will save or add 341,000 jobs.
4. The program will result in additional federal income tax receipts of $3.7 billion per year.
5. The program will add 0.11% to US GDP.
   

In summary, it appears that the program was an outstanding success from a return on investment perspective and will significantly improve the economy but will do little to improve energy independence.


DETAILED BENEFIT ESTIMATES FROM PROGRAM

$250,000,000 Additional sales tax to states & counties
3,567,447 BBLS of oil saved per year @ 19.5 gallons gas per 42 gallon barrel. Remainder of 42 gallons other products and/or lost in process.
1,656,315 BBLS of oil saved per year @ 42 gallons gas per 42 gallon barrel. Actual conversion factor is 19.5 gallons per 42 gallon barrel.
$231,884,058 Annual reduction in payments for oil to foreign countries @ 19.5 gallons of gas per 42 gallon barrel.
$107,660,455 Annual reduction in payments for oil to foreign countries @ 42 gallons of gas per 42 gallon barrel.
$16 Billion Annual increase in GDP
341,450 Number of jobs created or saved as a result of program
$3,680,000,000 Annual increase in IRS income tax receipts

ASSUMPTIONS/VALUES USED TO DERIVE BENEFIT ESTIMATE

250,000 # of new cars purchased in initial Cash for Clunkers program.
8 Avg MPG improvement
15 Avg MPG of clunker
23 Avg MPG of new car
5.00% Avg sales tax rate
$20,000 Avg cost of new car purchased
12,000 Avg miles driven per year from Federal EPA estimates
4 Money Velocity
23.00% Avg Federal Marginal Tax rate from the National Bureau of Economic Research
80.00% Domestic content of new vehicles
$65 Cost of barrel of oil
$46,859 2008 US GDP per capita from IMF

- Sales tax receipts by state and local governments will not result in increased expenditures.
- All consumption resulting from new car purchases will be spent on domestically produced goods and services.
- All consumption resulting from new car purchases will be spent rather than saved.