Tuesday, May 11, 2010

pulling out the proverbial crystal ball on the macroeconomy, health care, and state/local finances

My most recent essay-- a version of which appeared in the Ft. Wayne Star-Press...

It's always hazardous to speculate about the future-- perhaps even moreso about politics and economics. Moreover, it's aggravating when so many people hear that I'm an economist and want to know what's going to happen to interest rates. I don't have any clue whether we'll have high inflation in the near future-- or what the unemployment rate will be in December.

But that said, I have a few ideas and want to get them on the record.

First, the most obvious point is that we have no idea where things will go politically in 2010, 2012, or 2014. Will voters "punish" the Democrats for the continuing recession, going against their will on health care, etc.-- or not? And if the GOP gains seats or even control, what will they do with it?

Second, moving on to a more subtle point: As I've often written, the chief problem in health care/insurance is over-insurance. Consumers pay about 10% of the overall tab, meaning they pay little attention to price/costs. Insurance is forced to cover all sorts of things that take us away from the role of traditional insurance-- to cover rare, catastrophic events. In recent years, the market has been limping (quickly) toward standard insurance-- as co-pays and deductibles have increased markedly.

Under ObamaCare and looking forward from now until the benefits emerge in 2014, we can expect premium increases to accelerate, which will accelerate the move toward catastrophic insurance. The interesting thing here is that the market may get us to the right answer before the law kicks into action. If that's the case, then it will be extremely difficult to hold the status quo. Either you'll have individuals with privately-financed catastrophic insurance who are being heavily taxed to provide Cadillac coverage. This is politically unacceptable. Or you'll have phenomenally expensive Cadillac coverage for all. This is politically problematic.

Consider also the "cultural" changes underway in health care. When I addressed a group of CEO's last Friday, one told the story of an employee whose son had broken his finger. The doctor said they'd x-ray it, but the parent slowed him down and asked what he would do if it were broken. The doctor replied: "Put it in a splint". The parent's reply: "Well, let's just put it in a splint now." The point? The parent was thinking much more carefully about the cost of the service, because it was going to come out of her pocket.

Consider another example: allergy shots. With low deductible/co-pay policies, allergy shots are virtually free. Under a high-deductible policy, one pays the full "cost"-- about $25 a shot. Now, I'm not positive on this, but I'm guessing that the marginal cost of providing an allergy shot is not $25. In any case, I'm even more certain that people will often be unwilling to pay that much. So, the cost will come down (dramatically) or that industry will wither. The point: the market will make large-scale changes in the next few years, as people bear the costs of their activities.

Third, under Bush's interventions and now ObamaNomics, the government continues to insist on kicking the economy while it's down. The health care legislation was bad enough-- for the macroeconomy-- since it increased costs for business. Beyond that, one would have hoped that it would have reduced risk and uncertainty-- a key concern for businesses making capital investments and expanding payroll. But since no one knows what the health care legislation will do, the risk and uncertainty remain (in spades). As a result, the macroeconomy is even less likely to emerge from its 27-month Bush/Obama funk.

Of course, that's important in its own right. But consider the impact on state and local governments. State/local budgets are already under significant strain-- modest in some states and tremendous in others. In Southern Indiana, New Albany has closed four schools and Harrison County laid off eight teachers. In Kansas City, they shut down nearly half of the schools. In Kentucky, state universities faced double-digit increases in tuition (since the subsidies to higher education were reduced). In California, tuition increased by 70%. State and local governments will continue to face diminished economic activity, property values-- and thus, tax revenues. This will increasingly squeeze lawmakers into increasingly unpleasant choices.


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