Obama on Healthcare – Lies, damned lies, and statistics

The problem I have with President Obama is that he’s too smart to be wrong by accident. I actually thought W. made mistakes because things were over his head. But BHO is a very smart man, so I have to believe he knows when he’s full of crap.

Take his current bugbear, the health insurance industry. Everybody loves to hate them, and not without reason. Their role in life is to make health insurance cheap, and the best way to do that is by making it illusory. Every time a health insurance company denies your neighbor’s claims, your premium goes down. That’s because health insurance is a very competitive business.

Health insurance companies really do compete on price. But only two things affect price: underwriting and administration. Assuming that competitive pressures make the companies substantially equal in administrative cost, the difference in price primarily reflects coverage and benefit decisions. We pay the companies to pay claims, but select them because they deny claims.

Especially claims for preexisting conditions. The issue is what insurance types call “adverse selection,” the tendency of people who need insurance the most to buy the most of it, so that the insured pool represents, in the aggregate, a greater risk than the total population.

Adverse selection comes in two flavors: conscious and unconscious. The unconscious variety is difficult to counteract. People who tend not to be careful about their risks tend to buy more insurance and take more comfort from it. (This is where adverse selection gets confused with another phenomenon called “moral hazard.” Moral hazard is the tendency of insured individuals to take greater risks because the net loss is less if those risks mature. People who are more prone than others to succumb to moral hazard tend to buy more insurance in the first place, and that’s a form of unconscious adverse selection.)

Conscious adverse selection is preventable. People who have been diagnosed with terminal illnesses are denied life insurance, not just because those people are bad risks, but because if people were allowed to wait until they incurred severe illnesses before buying life insurance, the number of people doing so would grow intolerably. Insurance is about sharing risk; if the risks aren’t insured until after they mature, there is no sharing.

In the health insurance business, the exclusion of pre-existing conditions is the key to successful underwriting. Just as a life insurer cannot allow people to wait until they get sick to buy life insurance, a health insurer cannot afford to let people wait until they encounter an expensive illness to buy “insurance” against its costs. A health insurer must exclude pre-existing conditions from coverage unless it adopts some other device to preclude – or pass on to its premium payers – the adverse selection that coverage of those conditions enables.

That’s not to say that there are no such devices available or that we, as a society, ought not to decide that they be used. (Mandatory enrollment at the earliest possible time is one of them. Hillary knew this and said so in the campaign. BHO, I believe, knew it, too, but didn’t say so.) But it does mean that pre-existing condition exclusions do not exist so that, as BHO says, insurance companies can “cherry-pick” the best risks, or “get out of paying” benefits because they “claim” that an illness is a pre-existing condition. Insurance companies cannot cover pre-existing conditions, so the fact that they don’t cover them can hardly be seen as a sign of corruption. The President’s saying so is a lie, and I believe he knows it.

The President is also lying about his public option. He says that we need a public option to “compete” with “the private sector,” to “keep it honest.” This notion so misconceives the nature of the private sector that it would be really scary if our President actually believed it. But he doesn’t. He can’t. Just what are the private companies, who compete tooth and nail with each other to provide the lowest premiums, being so uniformly dishonest about that a public competitor would fix? Would the public competitor cover pre-existing conditions? Not if it’s required not to lose money. What would it do?

My guess is that the public option would simply pour red ink on the fire, undercutting private insurance on price no matter what the cost. The object will not be to make insurance companies “honest,” but to make them unprofitable in the hope they will go away. There is an irony here: Newt Gingrich said that he wanted to create a private scheme to compete with Medicare so that Medicare would wither on the vine as people leave it voluntarily. I suspect that BHO has the same plan for private health insurance, and his claim that his public option is not a “Trojan horse” is true only in the sense that Bill Clinton’s denial of “sex” with Monica Lewinsky was true: technically accurate, but not in any useful sense true. I think it’s a damned lie.

As for statistics, why bother? Everybody knows politicians distort statistics. Like that large number of people who aren’t covered because they choose not to be even though they can afford to be. But statistics are boring, and if Mark Twain hadn’t mentioned them in his effort to supply a title to this post, I wouldn’t mention them either.

Of course, I could be wrong about all of this. President Obama may in fact be so biased against insurance companies because of his mother’s experience with their efforts to keep their premiums down that he actually think they are all evil and actually does not understand the industry at all. He should feel free to offer that explanation.

Two Cheers for Free Trade

Everybody knows that trade benefits both parties. Otherwise, they wouldn’t take the trouble to do it. But that does not mean that free trade lifts all boats; it only lifts the boats of its participants. What happens next may be good or bad.

Let’s go back to Ricardo's example of comparative advantage. The Portuguese people benefit from the importation of English cloth because a bolt of cloth now costs them only $90 instead of $100. But what about the Portuguese cloth industry that was booming before the English showed up with their demand for wine and offer of “cheap” cloth?

I don’t mean that the displacement of workers is necessarily bad. Technology displaces buggy whip workers all the time, and there’s no reason trade shouldn’t displace them, too. But doesn’t it matter how many Portuguese were employed in the cloth industry? The theory supporting free trade is that capital and labor will move to the industries in which the local economy has a comparative advantage: Portuguese cloth workers will replant their cotton farms with vines to accommodate the British demand for Portuguese wine.

But whether that can happen in the real world depends on real-world phenomena. How much wine can be made in Portugal? How many people were employed making cloth? What happens if the Portuguese want more British cloth than the British want Portuguese wine? The British may be willing to lend the Portuguese the money they need to buy their cloth – economies of scale, what? But then, where will the displaced Portuguese cloth workers work? What will happen to the value of their homes? What about the businesses where they used to spend the money they are no longer making?

The Portuguese cloth worker in this example is not standing in for the workers in any one industry disadvantaged by an emerging trade opportunity. He is standing in for all of the workers displaced by free trade as our trade deficit grows. Because at the end of the day, the increase in the trade deficit is “funded” by the displacement of real workers in the deficit-running economy. It’s all well and good if these people can earn comparable incomes elsewhere, but there is no a priori reason to believe that such is the case. Historically, we’ve been able to cope with technological and trade-based displacement. But that’s not proof that it’s always possible, and we ought not to pretend that it is always possible.

The possibility that one trading partner will not be able to adjust to the displacements of trade is especially acute when the other partner’s comparative advantage lies in the lower standard of living of its workers. What that partner has to sell is not a product, but manufacturing itself. There aren’t many non-manufactured goods that a country can have a comparative advantage in. Natural resources, agriculture, software (including entertainment), engineering, and some others come to mind, but not enough to employ all the displaced workers. The displaced workers can take in each other’s wash, and as long as the partner with the cheap labor will lend its customers money with which to pay each other so that they can continue to buy from the manufacturing partner, the displacement may not seem as severe as it actually is.

But the borrowing does have to be supported by something, and eventually the non-manufacturing partner runs out of creditworthiness. First, unsecured private credit becomes hard to get. Then collateralized credit is tainted by bogus collateral (e.g., mortgages backed by over-appraised real estate), and the music stops. Only the national government is able to borrow. And even that credit becomes questionable over time.

The only way out of this mess may be for the manufacturing partner’s comparative advantage to be eliminated. There are only two ways to do that, and they are not mutually exclusive. One is to impose tariffs on manufactured goods. Plan B is to equalize the standards of living of the workers in the respective partners. And, of course, there are two ways to do Plan B, and they are not mutually exclusive either: improve the standard of living of workers in the exporting country or lower the standard of living of workers in the importing country.

Unfortunately, doing nothing is not an option. The system will equilibrate by forcing Plan B, and a lowered standard of living in the non-manufacturing country will feature prominently in the rebalancing. This natural equilibration has to be recognized and understood as the consequence of not imposing tariffs. So, when opponents of protectionism say that trade barriers will “lower our standard of living” by making imports more expensive and hurting our exports (which becomes less and less of a problem as the only thing we have comparative advantages in are things we have a virtual monopoly in), they will only have shown one side of the scale. The other side is the lowering in our standard of living that will result from not imposing tariffs. That side of the scale is harder to measure, but that does not mean it’s any less real or any less to be feared.