Tag Archives: free market

Myths and Legends: The Medicaid Issue in Nevada

There was a Republican politician on my television screen this morning telling me, or trying to tell me, that Medicaid was “meant for mothers, children, and those who couldn’t work…” This is outdated. Then, he tried to convince me that Medicaid was being “abused” by those who work and ‘game the system,’ while spouting platitudes about the Free Market and the Joys of Competition.  Let’s start at the very beginning.

This is the explanation of Medicaid as reported by Nevada’s Division of Health Care Financing and Policy (pdf)

“Medicaid is the nation’s main public health insurance program for people with low incomes and the single largest source of health coverage in the U.S.”

The program is meant to help people with low incomes.

“The PPACA extended coverage to many of the non-elderly uninsured people nationwide. The June 2012 Supreme Court Ruling made Medicaid expansion optional for states, and Nevada elected to join the expansion and maximize federal dollars. Effective January 1, 2014, this move broadened Medicaid eligibility to nearly all adults under age 65 with income at or below 138% of the Federal Poverty Level (FPL). At the end of SFY 2014 that meant that there were an additional 125,989 new enrollees in Nevada Medicaid, and increased expenditures of $154,816,777.00. These new expenditures are 100% federally funded.” [NV med pdf]

Medicaid expansion added those working Americans who were earning 138% of the poverty line and below, (pdf) and more specifically: (1) Those between the ages of 19 and 64 who are earning less than 138% of the FPL. (2) Pregnant women in homes earning less than 165% of the FPL. (3) Children from birth to 19 years of age in homes wherein the earnings are at or below 205% of the FPL, with a small premium required in some cases. Translated into real people with real levels of low income earned, this means a family of four would be eligible for Medicaid in Nevada if the family earnings are less than $2795 per month; for pregnant women if the earnings are at or less than $3341 per month; and families are eligible for the kids’ Check Up program if family earnings are less than $4151 per month.

If we calculate annual earnings, then monthly earnings of $2795 mean an annual income  of $33,540. At $3341 annual earnings of $40,092, and at $4151 annual income of $41,630. Nevada’s median income is $52,431 (2015). To put these numbers in perspective, the average weekly wages of a person working in a private restaurant in this state are $382, or $1528 per month ($18,336 yearly). [DETR] The average rent for a 2 bedroom apartment in Las Vegas, the obvious site for most private restaurants, is $932 per month. [RJ] In short, not only are wages not all that generous in Nevada, the benefits available for Nevada families aren’t all that generous either.

Republicans, however, strenuously oppose benefits for adults capable of working. This would make infinitely more sense IF and ONLY IF they were willing to support a living wage for all employees. One really doesn’t get to have it both ways.  Either you want a reduction in benefits that most working people can afford to purchase on their own because they have the financial resources to do so, or you want lower wages which mean that individuals and families cannot afford those things, like health insurance, and the public benefits are required to make up the difference.  However, at this point we slam into another GOP myth.

Free market competition will make health insurance affordable for everyone, even those who are working in low wage jobs.  Good luck with that. Personally, I have yet to hear anyone explain with any specificity why health insurance corporations will be flocking to Clark, Washoe, or even Esmeralda counties because there is more “free market” applied to the situation. If the insurance companies weren’t wildly excited about selling individual and family health insurance before the enaction of the ACA, why would they do so now? Unless, of course…

They could sell policies that didn’t cover all that much? That cost more for those between the ages of 50 and 64?  That didn’t cover maternity expenses? That didn’t cover preventative care? That didn’t cover drug rehabilitation and mental health services in parity with physical treatments? That only covered the items required in those states with the least consumer protections? And, even then all we have to look to is the situation in Nevada when insurance corporations were free to offer what they were pleased to call comprehensive policies.  Again, if they weren’t interested in selling a plethora of individual and family policies then why believe they would be now?

And that Free Marketeering? It doesn’t work in the health care industry:

“In a free market, goods and services are allocated through transactions based on mutual consent. No one is forced to buy from a particular supplier. No one is forced to engage in any transaction at all. In a free market, no transactions occur if a price cannot be agreed.

The medical industry exists almost entirely to serve people who have been rendered incapable of representing their own interests in an adversarial transaction. When I need health services I often need them in a way that is quite different from my desire for a good quality television or a fine automobile. As I lie unconscious under a bus, I am in no position to shop for the best provider of ambulance services at the most reasonable price. All personal volition is lost. Whatever happens next, it will not be a market transaction.” [Forbes]

The only thing I can say with any certainty is that the Republicans have little idea exactly what constitutes a Free Market, and instead are waving it like a banner crovering their underlying desire to be free from the moral requirements compelling us to be our brother’s keepers.  The range of misanthropic explications are appalling, from “we need not do anything because the poor will always be with us anyway,” to “when Jesus told us to provide for one another he only meant fellow Christians.”

The Repeal and Replace campaign is as void of humanity as it is of understanding of the reality of most family economics, and of the comprehension of what the term ‘free market’ actually means.

 

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No Free Lunch No Free Market

“The market is a human creation. It is based on rules that humans devise. The central question is who shapes those rules and for what purpose,” Reich concludes. “The coming challenge is not to technology or to economics. It is a challenge to democracy. The critical debate for the future is not about he size of government; it is about whom government is for.” [Robert Reich]

Bingo!  Adam Smith, in Wealth of Nations, offered the Invisible Hand – and economists have been grabbing it ever since. IF, they mused, if all buyers and sellers were truly free then markets would achieve equilibrium and all will be well.  Everyone will act in their own self-interest, and the competition induced will benefit all.  There will be an equilibrium price – for anything – when the demand and the supply are equal.  However, there’s always been a flaw in this argument.

The cracks begin showing when it’s noted that “price” and “value” are not the same thing.  Truly, there is a “market value,” i.e. the price at which an asset would trade in a competitive auction setting, but this isn’t a definition of value.  Value is a qualifier we assign to things that are beneficial, significant, advantageous, or useful. Let’s digress a moment and review why this differentiation between price (even market price) and value is important.

Finance works best when it acts as the conduit for moving capital from places of surplus to places of scarcity.  In the simplest possible terms, finance allows the money in someone’s savings account to be invested in someone else’s business enterprise.   The owner of the savings account benefits from the earnings; the owner of the business enterprise benefits from the extra cash to expand his operations.   Not to put too fine a point to it, but when finance doesn’t move capital from surplus to scarcity then it’s not finance – all too often it’s merely gambling.

Additionally we should note that the the system itself is a gamble.  If I put in a $1000 investment in Widgets International Inc. then I’m betting my shares will either pay dividends, gain in price, or preferably both.  And now to return to “value.”  I’m taking a risk with my money, but I’m also hoping to invest in something of value – perhaps WI Inc. manufactures the best product on offer which helps nurses prevent bed sores from afflicting their patients.  I have $1000 on hand (surplus), Widgets International Inc. needs to expand to meet the demand for its product (scarcity) and finance allows the conduit to work toward mutual benefit.

However, what if I behave as though my $1000 really isn’t surplus? What if I make a side bet that the price of Widget International will go down?  In this instance I am buying a “financial product” which has precious little to do with the product the company is manufacturing, a bit more to do with how the company is managed, and a great deal to do with how a hedge fund can be used to “manage wealth.”   Or, to put it another way – to reduce risk.  Money (capital) slathered about in an effort to reduce risk isn’t part of that conduit for moving capital from surplus to scarcity, and it (as we’ve seen) is fraught with consequences.  The word “behave” is the key term.

If the concepts of price and value are problematic in a discussion of American economics, then our Economic Man as described by Adam Smith is also at issue:

“Economic Man makes logical, rational, self-interested decisions that weigh costs against benefits and maximize value and profit to himself. Economic Man is an intelligent, analytic, selfish creature who has perfect self-regulation in pursuit of his future goals and is unswayed by bodily states and feelings. And Economic Man is a marvelously convenient pawn for building academic theories. But Economic Man has one fatal flaw: he does not exist.” [Harvard]

The “convenient pawn” became the cornerstone of neoclassical economic theory.  The theory elevated the pawn, and the pawn returned the compliment by rationalizing everything from child labor to global out-sourcing.   The Magic Market would “equalize” everything, and all would be well.  In fact, there is no such thing as a free lunch, and there is no such thing as a free market.

In fact, if we skip the jargon (such as a trader saying “I make markets”) what we understand is that traders in the financial sector are sales personnel who have products to sell to prospective buyers.   Last time we looked those sales personnel, the buyers, and the sellers were all human beings – or human beings managing various and sundry enterprises.  Even if  trading is  computerized, someone – some human being – had to program those computers, which still have no innate capacity to count beyond 0 to 1.  There are some benighted souls who believe that if we have just enough “self monitoring,” and more elegant algorithms those messy, inconsistent human beings will no longer screw up the financial markets.  Again, we’d have to ask, “Who is writing those algorithms?” And,  how much “self-monitoring” is good enough?   There are markets, but they are certainly not free of human beings – humans being the brokers, the agents, the buyers, and the sellers.

“Who shapes the rules, and for what purpose?”

We have rules for all manner of human transactions.   When sharing a meal we don’t eat the mashed potatoes with our hands. When getting an invitation with an “RSVP” we don’t wait until after the event to respond.  A soccer match is played with only 11 on each side.  The FAA has rules for take offs and landings to minimize the risk of collisions.   And we have rules for financial markets.   Why? Because a market is simply a transaction between two human agents – buyer and seller – no matter how computerized.

One thing we did learn during the debacle of 2007-2008 was that some investment houses were selling products on which they could calculate a price but they were incapable of determining the product’s value. In some instances the artificiality of the product and its distance from anything tangible, such as a home mortgage, made it impossible to determine what the product was actually worth.  All too much of the Stuff had a “market price” but turned out to have no value in the last analysis.  Thus the demise of Lehman Brothers.

There are some questions at the intersection of economics and politics in 2016:

  • Do we want an unfettered market for financial products? Do we want rules advantageous to the sellers of products in the financial markets? Do we want rules advantageous to the buyers in financial markets? Do we want rules which protect the general public from irresponsible or anti-social behavior on the part of the buyers and sellers?
  • Do we want those who write the rules for the transactions in the financial markets to have the interests of the general public in mind?
  • Do we support agencies which enforce rules designed to restrain the behavior of buyers and sellers in the financial markets?
  • Do we encourage investment or speculation?
  • Should our system of taxation reward work or wealth?

We can focus down on a single issue illustrative of the general regulatory environment – this past July a Senate Committee was taking testimony on a proposed rule that investment advisers place the client’s interest first when deciding upon investments in retirement accounts. One member of the panel offered that the rule would “cost” the investors some $80 billion because financial firms would simply raise fees to make up the profit differential if they couldn’t put their own interests before the interests of their retirement account clients. [Litan pdf]  However, what didn’t go unchallenged was that the study cited by the panel member was financed by the Capital Group, a corporation which definitely stands to benefit if the proposed rule from the Department of Labor is not implemented. [BostonGlobe]

The question highlights the element of freedom:  Is the investment adviser free to purchase elements in a portfolio which enhance the profitability of his firm, or must the adviser give first priority to those investments which will best serve the clients’ interests?  Is the client free to assume his agent (investment adviser) is acting in his or her best interests?  Is the client free to know how investment portfolio decisions are made?  It isn’t a question of whether or not the “market” is “free,” it’s a question of who is free to do what.

Consider for a moment a situation in which a large employer has selected a financial advisor to manage its retirement program.  There are three human agencies at play: the employer, the employees, and the financial advisors.  And, because there are human beings involved we should assume that these relationships are contractual. If the financial advisors are placing their own interests above those of the retirees, then must the employer seek to break the contract? Under what conditions and at what expense?  Are the employees free to take their contribution elsewhere? But, what of the employer’s contributions?   In the rarefied theoretical academic version of a Free Market this would never happen – all the pawn would march neatly across the board. However, this isn’t a theoretical academic version – this is real life – and if the financial advisor is “free” to act in his or her firm’s interest, what happens to the contributions of the employer and the employee? If they act in their self interest then they must cut ties with the advisors.  If the adviser is “free” to act in his or her self interest the employer and the employees lose value in their retirement investments; if the employer and employees are “free” to act in their own self interest the adviser loses the account.   We are left asking: Who is going to write the rules of our economic game? Or to put it in economic-political terms:

“The most important political competition over the next decades will not be between the right and left, or between Republicans and Democrats. It will be between a majority of Americans who have been losing ground, and an economic elite that refuses to recognize or respond to its growing distress.”  [Reich]

References/Recommended Reading:  John Lanchester, “Money Talks: Learning the Language of Finance,” New Yorker, 8/4/2014.  Craig Lambert, “The Marketplace of Perceptions.” Harvard Magazine, March-April 2006.  Michael Blanding, “The Business of Behavioral Economics,” Forbes, August 2014.  Adam Ozimek, “The Future  Irrelevancy of Behavioral Economics,” Forbes, September 2015.  Dan Ariely, “The End of Rational Economics,” Harvard Business Review, July-August 2009.  Paul Krugman, “How did economists get it so wrong?” New York Times Magazine, September 2009.  Noah Smith, “Finance has caught on to behavioral economics, Bloomberg View, June 2015.  Robert Litan, Senate Subcommittee on Employment and Workplace Safety, Senate HELP, July 21, 2015. (pdf) Annie Linsky, “Warren…Brookings Institution,” Boston Globe, September 29, 2015.  Robert Reich, “How the pro-corporate elite has rigged the system against the rest of us,” Alternet, September 29, 2015.

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The Crisis Factory goes Dancing With the Debt Fetish

Marathon DancersOne of the little problems with the Politics of Hyperbole is that eventually someone may notice not every minor annoyance constitutes an emergency.  Not even every major issue is an emergency.  However, nothing has prevented the radicals from manufacturing crisis after crisis in order to monopolize the conversation and distract this country from some very real issues we need to address.

The Distractions

Pillar OnePeople are in imminent danger of becoming dependent upon government.   Hogwash. Only the most extreme social libertarian would contend that having police, fire, and emergency medical personnel creates “dependency,” and how foolish does a person have to be to argue that we don’t need public health inspectors?  Further, if we allow for the old saws that two “heads are better than one,” and “many hands make light work,” then we know there are many tasks at which we do much better when we work together: Building roads, dams and bridges; Conducting relations with foreign countries; Protecting our citizens from or responding to natural and man-made disasters; Promoting our national economy.  And the list goes on.  Or, to introduce yet another well known concept:

“No man is an island,
Entire of itself,
Every man is a piece of the continent,
A part of the main.
If a clod be washed away by the sea,
Europe is the less.
As well as if a promontory were.
As well as if a manor of thy friend’s
Or of thine own were:
Any man’s death diminishes me,
Because I am involved in mankind,
And therefore never send to know for whom the bell tolls;
It tolls for thee.” — John Donne (1572-1631)

Pillar Two: People are burdened by an unconscionable level of federal debt.   This argument is extremely convenient for those who have another agenda — cutting spending on domestic programs with which they are in fundamental disagreement.  The proposition requires adopting a variation on the White Queen’s belief in “six impossible things before breakfast.”

The United States is the most powerful nation, with the most powerful economy in the world.  China’s GDP is $8.227 trillion; U.S. GDP is $15.68 trillion.  Therefore, it is necessary to manufacture PERIL in order to substantiate the claims that we are burdened by indebtedness such that we cannot afford to (fill in the blank with the program one wishes to dismantle).   There are some real issues, just not the ones usually cited in the conservative press.  For example:

The Trifflin Dilemma Peril:  “He pointed out that the country whose currency, being the global reserve currency, foreign nations wish to hold, must be willing to supply the world with an extra supply of its currency to fulfill world demand for these foreign exchange reserves, and thus cause a trade deficit.”  Translation – The stronger the nation the more likely other nations are to want to invest in it, and the more other nations invest in it the more vulnerable the nation becomes to foreign influences on its economy.

A variation on the Trifflin Dilemma often shows up in the conservative media in the form of a new version of the old obnoxious  Yellow Peril argument — What if China called in its investments?  They could OWN us.  Instead of rewriting the posts, this topic has been discussed at more length in “The Republican Debt Wish” (2006), “Something to Think About,” (2008) and “When Willful Ignorance Meets Economic Reality,” (2011).

One one of the consequences of paying attention to the debt, as opposed to focusing on the economic growth which facilitates the repayment of those obligations, is dangerous in itself, as explained by Nobel Prize winning economist Joseph Stiglitz:

“The fundamental problem is not government debt. Over the past few years, the budget deficit has been caused by low growth. If we focus on growth, then we get growth, and our deficit will go down. If we just focus on the deficit, we’re not going to get anywhere.

This deficit fetishism is killing our economy. And you know what? This is linked to inequality. If we go into austerity, that will lead to higher unemployment and will increase inequality. Wages go down, aggregate demand goes down, wealth goes down.” [HuffPo]

Pillar Three: The free market will cure all ills.   When pressed to explain why, for example, the Affordable Care Act, is so onerous, the right is often moved to propose that the “free market” could have solved all the problems associated with health care insurance situation in the United States.

The first question we need to ask in regard to this contention is: Are we using the right tool from the box?  Consider your utensil drawer in the kitchen.  Does it contain at least one table knife, bent at the tip because it was pressed into service as a screw driver or as a lever?  Like the trusty table knife, the free market is an excellent tool for delivering the goods and services we require, but there are some tasks for which is it simply not the best implement to apply.

We could apply the free market to our transportation system by privatizing all our now public roads and charging tolls for their maintenance and use — however, we need to calculate the cost to our economy of raising costs for the factors in our transportation sector.  In this instance, the cost to the trucking industry is a negative factor in economic growth, and it is better policy to “subsidize” the industry by providing well maintained roads and functional bridges to secure the benefits of our economy.

Since we accept that corporations should operate for a profit, then in the realm of health care insurance it makes good free market sense for the company to insure only healthy persons (certainly not those with pre-existing medical conditions, or those who are elderly) and to keep those medical loss ratios at the lowest possible level.  In short, if we allow the free market to function in its purest form in the delivery of health care, then we should rationally expect that the least costly services will be provided, to those who need the least service.  Sometimes it’s really not about the money.

We can quantify the economic contribution of a father or mother in the family, but that doesn’t determine his or her value.  We don’t calculate a cost-benefit analysis in order to decide on marriage. We can quantify the economic contribution of roads, bridges, and airports, but that alone doesn’t determine their value to us.  We can quantify the benefits of education in terms of test scores, but we can’t determine how a person will synthesize information accumulated from the arts and from engineering to determine the best design for a marketable household appliance.

Focus Please

There are issues we need to address, most of which have profound implications for our economy. Among these are:

#1. Global climate change.  This isn’t “lib’rul hype;” this is about living on a planet capable of sustaining human life. Yes, if we foul our nest, the planet will probably last another 6 billion years, but WE won’t.   The 2007 University of Maryland study (pdf) projects economic impacts in terms of agriculture, energy, and transportation; in terms of our eco-system; and, in terms of water and infrastructure elements.   The fifth assessment from the IPCC released recently should convince all but the most delusional that WE are the problem.

The conservatives continue dancing with the Debt Fetish

#2. Student Loan Indebtedness.  If we’d really like to have young people start contributing to our economy, especially in regard to consumer spending, then it would be nice if they had more unencumbered income with which to do just that.  The Wall Street Journal calls the current situation the “Student Loan Straitjacket.”

The conservatives continue to dance with the Debt Fetish, but “What of the debt for our grandchildren?”  Flash Dispatch to the conservatives — These ARE our grandchildren.

#3. Infrastructure issues.  It isn’t like the American Society of Civil Engineers haven’t been trying to get our attention.  The National Report Card is not pleasant or reassuring reading — but it should be read, and we should be paying attention.

The conservatives continue to dance with the Debt Fetish.  How do we pay off any portion of the debt if our physical infrastructure is so dilapidated as to impede the progress of our distribution systems?

#4.  Employment. Of all the associated issues this is the most central.  We could be putting people in the construction sector back to work if we could enact funding for infrastructure projects.  We could be putting people to work in alternative energy projects… We could be putting people back to work in new jobs in new manufacturing sectors.  However, we are still dancing with the Debt Fetish…

…and like the marathon dancers of the Depression Era we will proceed having put a great deal of effort into endeavors promising very paltry results.

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