Free Markets, Free People


Krugman and the false prophets of economics

The one-trick pony that is Paul Krugman, constantly pushes massive government spending as the panacea for all recessionary ills.  It is supposed to be the way one “manages the economy” from a central government position – as collectivist a thought as one can imagine.

In fact, one of Krugman’s criticisms – despite the fact that his estimate of the amount needed to stimulate the economy was $200 billion less than what was passed in the stimulus package – is that the government hasn’t borrowed and spent enough.  And he certainly is no fan of austerity, claiming that the “pain caucus” has been in charge (what almost a year trying to address decades of borrowing and spending?), with no significant results and oh, by the way, look at the UK.

“In Europe,” he wrote last week, “the pain caucus has been in control for more than a year, insisting that sound money and balanced budgets are the answer … [But] Europe’s troubled debtor nations are … suffering further economic decline thanks to those austerity programs.”

Yes, friends, “sound money and balanced budgets” are, apparently, things to be avoided.

But curiously Krugman never says, “oh, by the way, look at Switzerland” because if he did, he’d have to explain their positive outcome based on austerity:

The Swiss have run a prudent fiscal policy throughout the economic crisis. They have had a structural surplus in each of the past five years. Their net debt is actually lower today than it was in 2005. And guess what? In 2009 their economy suffered the smallest contraction in Europe, with unemployment today below 4 percent. As for sound money, the Swiss franc is up 95 percent against the dollar since 2000.

The key point is the Swiss never let their economy get in the shape that is now plaguing the rest of Europe and the US.  It has never spent and taken on debt like the UK, much less Portugal and Greece.  It has been a program of economic austerity for years.   Consequently, the debt level is miniscule compared to other Western economies and recovery was quick with minimal intrusion (if any) from government.   We, on the other hand, were borrowing in good times and borrowing heavily to spend on things our government has no business involving itself in much less borrowing money to do so.  And it points out that even if you buy into the Krugman theory that we ought to be borrowing and spending in “bad times” ala Keynes, the other borrowing that has taken place limits those options considerably:

The real lessons for the United States are clear. Those who run up debt in good times can borrow only so much more when a recession strikes. And heavily indebted governments postpone fiscal stabilization at their peril. If you wait to reform until the bond market calls time, you are—to use a technical term from economics—screwed.

And we’re headed toward that “technical term” more quickly than we can imagine, and yet the Krugman’s of the world still counsel more spending of borrowed money leading to more accumulation of debt. 

At a certain point, the amount of debt begins to shave percentage points off the GDP as the debt is serviced.  That, at least in my opinion, is where we are now and one of the reasons we’re seeing such a slow recovery.  GDP growth, last quarter for instance, is not at all robust:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.8 percent in the first quarter of 2011…

Economically we have to understand, at the highest levels, that despite the siren songs of Keynesians like Krugman, that the bill has come due – in fact it is past due-  and must be addressed and paid.  We  can’t afford to ignore it anymore, nor pretend that spending borrowed money will do more good than harm.  We and the can are at the end of the road.  It can’t be kicked anymore without dire consequences.  Unfortunately, while it seems we’ve at least recognized that fact – for the most part – what we can’t seem to make ourselves do is that which is necessary – cut spending deeply.  We continue to hear from the false economic prophets that we can fix all this if we’ll just borrow and spend.  


Twitter: @McQandO

A Closer Look At European Health Care

We continue to hear how wonderful it is as compared to the horrible US system.

But is it? One of the fundamental truths of any health care system is you have infinite demand meeting finite resources (beds, doctors, availability, etc). Whatever system a country has, that truth doesn’t change.

So, regardless of system, there is going to be some sort of rationing. It is unavoidable and inevitable.

Now add a desire to control and cut costs associated with the provision of health care to the mix (the promise of every one of these government systems). On the one side, as European nations have done, access to health care is expanded to include everyone. On the other hand, these same nations attempt to control health care costs.

The result? Very mixed. France is always held up as the exception to the rule that government health care can’t be both good and inexpensive. But a closer examination seems to indicate that it isn’t an exception at all:

A World Health Organization survey in 2000 found that France had the world’s best health system. But that has come at a high price; health budgets have been in the red since 1988.

In 1996, France introduced targets for health insurance spending. But a decade later, the deficit had doubled to 49 billion euros ($69 billion).

“I would warn Americans that once the government gets its nose into health care, it’s hard to stop the dangerous effects later,” said Valentin Petkantchin, of the Institut Economique Molinari in France. He said many private providers have been pushed out, forcing a dependence on an overstretched public system.

Why have private providers been “pushed out”? Because government has provided health care “cheaper” than do private providers (and obviously at a loss given the deficit). Notice I said “cheaper”. That doesn’t necessarily mean “better”.

And the same thing is being seen in other European health care systems which are considered “models” of government run health care:

Similar scenarios have been unfolding in the Netherlands and Switzerland, where everyone must buy health insurance.

“The minute you make health insurance mandatory, people start overusing it,” said Dr. Alphonse Crespo, an orthopedic surgeon and research director at Switzerland’s Institut Constant de Rebecque. “If I have a cold, I might go see a doctor because I am already paying a health insurance premium.”

Cost-cutting has also hit Switzerland. The numbers of beds have dropped, hospitals have merged, and specialist care has become harder to find. A 2007 survey found that in some hospitals in Geneva and Lausanne, the rates of medical mistakes had jumped by up to 40 percent. Long ranked among the world’s top four health systems, Switzerland dropped to 8th place in a Europe-wide survey last year.

Dr. Crespo’s point is simply an astute observation of human nature. If something doesn’t directly cost the user, why would the user ration the use of such a benefit?

The use, however, still costs someone or something. The doctor must be paid, the institution must be paid, etc. So in the end, the only way to control costs is to cut payments. Eventually, the incentives to enter the health care field become less attractive (unless you like long hours, overrun waiting rooms, minimal time with patients, being second-guessed by a bureaucracy and making much less than a private system allows for compensation) and there are fewer that enter the field. Hospital beds then drop, hospitals merge and there are fewer specialists available to serve the population as Switzerland is discovering.

And then there’s the lack of innovation to face.

Bureaucracies are slow to adopt new medical technologies. In Britain and Germany, even after new drugs are approved, access to them is complicated because independent agencies must decide if they are worth buying.

When the breast cancer drug Herceptin was proven to be effective in 1998, it was available almost immediately in the U.S. But it took another four years for the U.K. to start buying it for British breast cancer patients.

The promise that has been made in the US is health care reform will return the decision making to the doctor. But that’s simply a false promise given the priorities of the reform we’ve been promised. It is to cut cost and make care “affordable” to all. Somewhere is a bureaucracy in waiting which will decide what “affordable” means – and it won’t include your doctor.

So you can expect innovation to begin to slow. Why invest billions when a bureaucracy will decide whether or not it’s a medicine or treatment worth the cost. The same bureaucracy will also decide what it will pay for your innovation. Of course, if the innovator can’t recover the cost of development and make a profit as incentive toward more innovation, the probability exits the developer will simply stop such research.

“Government control of health care is not a panacea,” said Philip Stevens, of International Policy Network, a London think-tank. “The U.S. health system is a bit of a mess, but based on what’s happened in some countries in Europe, I’d be nervous about recommending more government involvement.”

Words of wisdom most likely to be ignored by our legislators here. And the unfortunate thing is it will not only destroy an excellent health care system here, but, given the level of government spending forecast, tank the rest of the economy as well.


[HT: Carol D]