Free Markets, Free People

Daily Archives: December 9, 2011

Ezra Klein: A larger welfare state might mean a smaller deficit

Honestly, that’s his premise.  You can read it here.  He bases his argument mostly in health care costs.  Obviously where he tries to go with it is toward a single payer system.  But he uses Germany as the model.  Anyone, does Germany have a single payer system?  No, it has a public health insurance program that covers 88% of the population.

Take Germany. They have a pretty big welfare state: pensions, health care, paid vacations, unemployment benefits equal to two-thirds of one’s income.

So that’s great and per Klein, who, like I said, wants you to believe by his vague general description, that Germany has a system like … Canada.

Don’t believe it?  Well it takes that sort of implication to make a statement like this:

To bring this across the Atlantic, you could argue that the United States’s debt burden is the product of an insufficiently large welfare state — at least with regard to health care. To see a stark illustration of that thesis, head to the Web site of the Organization of Economic Cooperation and Development and download their health-care statistics for Canada and the United States [emphasis mine].

Notice how apparently we transitioned seamlessly from a country with health insurance to a country with a single payer system without that being obvious?  In reality we’ve looked at the apple, now he plans on comparing it to the orange:

As recently as 1965, the cost of those two systems competed neck-and-neck. That year, Canada spent 5.9 percent of its GDP on health care. The United States spent 5.7 percent. But around that time, Canada was transitioning to its current single-payer system. Over the next four decades, the growth of health-care costs slowed in Canada while it accelerated in the United States. By 2009, Canada was spending 11 percent of its GDP on health care — and covering everyone. The United States was spending 17.4 percent of its GDP and leaving 45 million uninsured. In dollar terms, we’re spending $3,600 more per person, per year, than Canada.

Emphasis mine.  It’s a pretty ballsy attempt, I’ve got to say.  Here’s another question for those paying attention.  Can anyone tell me what began in 1965?  Anyone?  That’s right … Medicare.  Per Klein, we were actually spending less than Canada until the same year that Medicare and government intrusion into the health care market was made law.

Based on that extraordinarily flawed bit of reasoning which managed to factor out or ignore a major reason for the increase in US health care costs, Klein concludes:

If the United States had Canada’s health-care system, and Canada’s per capita health-care costs, we would have a much “larger” welfare state, but we wouldn’t have a deficit problem.

Really?  Seriously?  You really want to run with that one, Mr. Klein?

Perhaps a less rosy look at Canada might help temper that nonsense a bit. Here’s a Canadian economic analyst speaking about the Canadian healthcare system:

"There’s got to be some change to the status quo whether it happens in three years or 10 years," said Derek Burleton, senior economist at Toronto-Dominion Bank.

"We can’t continually see health spending growing above and beyond the growth rate in the economy because, at some point, it means crowding out of all the other government services.

"At some stage we’re going to hit a breaking point."

It means crowding out other government services or what? 

That’s right, deficits.

Well, except in Ezra Klein’s magic welfare state where one can happily spend whatever they want and there are no apparent consequences or … deficits.

~McQ

Twitter: @McQandO

Obama’s Climate Change Plan: Barter away your Grandchildren’s money, legislate away yours

Todd Stern, the Obama administration’s “Special Envoy for Climate Change”,  held a quick press conference in Durban, South Africa where a UN conference on climate change is being held.  He first made it a point to deny that the US was taking a “time out” until 2020.  He then said a couple of things which should make clear the administration’s agenda.

First, without a viable alternative for fossil fuel to this point, the intent of the administration is to increase prices on those fuels that will ensure they’re “priced the way they ought to be”. Stern:

You need to use less energy through efficiency and to develop renewable energy sources more and more to the point that they get to what’s called grid parity, so that standing on their own they actually become sources of energy that can compete with sources like coal and so forth, fossil fuels.

And it is a very good thing to have those fossil fuel sources priced the way they ought to be, to have a price on carbon. That’s what we were trying to do with our legislation, it didn’t pass, but that kind of legislation obviously is in place in Europe, and hopefully it will come into place more and more.’

Now remember, this is from the administration that has claimed the mantle of champion of the middle class.  Yet its plan is to price much of the middle class into energy poverty if it can ever get its legislation passed.  And for those that will try to argue that it’s a plan for the future when there are, arguendo, viable alternatives, that’s nonsense.  “It didn’t pass” tells you all you need to know about that claim.

Secondly, this administration has bought into the 100 billion (a year) dollar fund that the “rich countries” are supposed to fund to help the “poor countries” (like China and India).  Stern:

We will also be working hard to ramp up the funding that is supposed to reach a 100 billion dollars a year by 2020. There’s a ton of work to be done in the years. We have been doing a lot of work on this, this year, and we will be continuing to do that as are many other countries. And all at the same time, if we get the kind of roadmap that countries have called for — the EU has called for, that the U.S. supports — for preparing for and negotiating a future regime, whether it ends up being legally binding or not, we don’t know yet, but we are strongly committed to a promptly starting process to move forward on that.

Tell your grandkids to start saving up, because the Obama administration is getting ready to shackle them and their future earnings to a global redistribution scheme based in fraudulent science (regardless of what Sen. Barbara “Ma’am” Boxer claims).

As with health care reform, there is no popular support in the US for this sort of nonsense, yet your enlightened rulers certainly believe they know better – just ask them.  And they intend to push their ideological agenda instead of doing the will of the people.  As for you little people, just suck it up and learn to appreciate (and pay for) their enlightened rule, OK?

~McQ

Twitter: @McQandO

Half Solutions Will Not Work

Brett Arends is skeptical about Europe’s current direction:

Their proposal is preposterous. Anything can happen in this life, but it would be remarkable indeed if this idea got off the ground. Anyone pinning their hopes that this will solve the crisis needs to think it through.

Why would the Portuguese accept the right of Germany to impose budget cuts on their country? Why would the Greeks?

Would we accept that role for the Chinese and the Japanese, the biggest holders of Treasury debt? How would you feel if you opened the paper to be told that the new Sino-Japanese “Fiscal Stability Commission” in Washington had just slashed your grandma’s Social Security checks by one-third, scaled back federal highway repairs, and that it would impose a 10% national sales tax?

That is, after all, effectively what is being offered to the people of Greece, Italy, Spain, Portugal and Ireland.

It’s absurd. There is no reason why these countries should have to surrender sovereignty. They can simply, where necessary, default. A default by, say, Louisiana would not destroy the dollar. Neither did the bankruptcy of Enron or Lehman.

What happens when after signing the new treaty (if it ever actually comes to be) the Greeks or Italians decide to thumb their noses at the EU and default anyway? Kick them out? Isn’t that right where we are now? Isn’t the fear that countries are kicked out or leave leading to financial chaos and defaults? Will these countries truly continue to pay their bills and accept austerity in the face of a severe recession/depression?

If that is the concern, just as I have been pointing out for some time, anything short of true fiscal and political union will fail. The right of existing states to refuse to honor the treaty (remember the last one was treated as inconsequential by violators, including Germany and France) cannot exist which means the right of states to secede or be expelled from the union cannot exist. If that option is not off the table then Eurozone bonds cannot be treated as risk free. If they are not seen as risk free then they will be rated accordingly and the Eurozone will be unstable as Louis-Vincent Gave points out:

Basically, we have to remember that the average sovereign debt buyer is not a hazardous investor. The guy who buys a government bond is looking for a very specific outcome: he gives the government 100 only so he can get back 102.5 a year later. That’s all the typical sovereign debt investor is looking for. Nothing more, nothing less.

But now, the problem for all EMU debt is that the range of possible outcomes is growing daily: possible restructurings, possible changes in currencies, possible assumption of other people’s debt, possible mass monetization by the central bank etc. Given this wider range of possible outcomes, and the consequent surge of uncertainty, the natural buyer of EMU debt disappears. Again, the typical sovereign investor is not in the game of handicapping possible outcomes; he is in the game of getting capital back!

This is very problematic because once uncertainty creeps in, bonds will tend to gradually drift towards what I have come to call the bonds “no-man’s-land”. Basically, once sovereign bonds reach 90c to par, they tend to have a much higher volatility and much greater uncertainty. As a result, they are no longer attractive to the typical bond manager or asset allocator looking to buy bonds to diversify equity risk (think how Italian bond yields are now correlated to European equities. If you want to be bullish Italian bonds, you may now just as well spend a fifth of the money and buy European banks for the same portfolio impact…). And once a bond enters into no-man’s-land, it has to fall a lot before attracting the attention of distressed debt and vulture investors (usually yields of 15%+). So the first obvious problem is that more and more European debt markets are entering this “no man’s land” bereft of “normal” investors.

Do these countries need the Euro over the long term to be prosperous? More Brett:

The British look smarter and smarter for staying out of the euro area in the first place. Prime Minister John Major, and then, later, Chancellor of the Exchequer Gordon Brown, each took the decision to keep the British pound free. At the time fashionable opinion predicted disaster for the Brits. So much for that.

(Predictably, fashionable opinion now says the Brits look “isolated” for staying out. Really, you couldn’t make it up).

My guess is Brett is correct that we are no where close to a real resolution, which is a path to political unification or breakup.

It has long been clear the Franco-German duo wanted to use their shared currency to bludgeon the continent into something closer to a federal system.

Any investor pinning their hopes on this bird flying needs to be aware it looks a lot more like a turkey than an eagle.

This week’s meeting of European leaders already marks the fifth “summit” to solve the region’s debt crisis since early 2009.

My favorite comment this time: “After a series of ‘final’ summits, it would be nice this time to have a real ‘final’ summit.” That was from Standard & Poor’s chief European economist, appropriately-enough named Jean-Michel Six. What’s the betting Mr. Six will be attending Summit No. Six in the new year?

Which is not to say that the ECB or some other entity couldn’t stem the immediate crisis and kick the can further down the road. Maybe, but if so the question is how far? A week, a year, five years? That I cannot answer now.

Economic ignorance, thy name is Obama

I’m not sure how else to describe this statement from “the smartest man in the room” concerning the Keystone XL pipeline and unemployment benefits:

As Obama called for passage of those bills, he also responded to a recent Republican push to require him to approve the construction of the Keystone XL pipeline from Canada. "However many jobs might be generated by a Keystone pipeline," he said, "they’re going to be a lot fewer than the jobs that are created by extending the payroll tax cut and extending unemployment insurance."

It’s rather hard to even imagine someone thinking that’s true.  Yet here’s the guy who is supposed to be making jobs his focus and economic recovery his priority and he thinks he’s doing his job by trying to get unemployment insurance extended?  He believes that the extension of the payroll tax cut is job creator?   Note the word – create, as in what Obama said.  While it certainly can be argued that on some level it might save a few jobs, if there were any to be created from its extension, they’ve most likely already been created. 

The Keystone XL pipeline on the other hand, will create thousands and thousands of jobs.

TransCanada is poised to put 13,000 Americans to work to construct the pipeline – pipefitters, welders, mechanics, electricians, heavy equipment operators, among other jobs – in addition to 7,000 manufacturing jobs that would be created across the U.S.  Additionally, local businesses along the pipeline route will benefit from the 118,000 spin-off jobs Keystone XL will create through increased business for local goods and service providers.

Of course, besides the pure economic ignorance displayed by the statement, Mr. Obama offers nothing in terms of numbers to back his claim.  It’s another in a long line of claims made recently that just aren’t true.

~McQ

Twitter: @McQandO