The High Price of Too-Low Administrative Costs

Supporters of “Medicare-for-All” (and other reforms that would give the U.S. government primary responsibility for purchasing everyone’s medical care) boast that Medicare demonstrates that government can reduce administrative costs below those in America’s bloated, inefficient private sector.  They’re wrong, as Ben Zycher ably demonstrates.

But even if Medicare’s administrative costs are lower, that’s not a virtue

Why?  As David Hyman wryly argues in Medicare Meets Mephistopheles, Medicare keeps administrative costs down by shoveling money out the door with very little oversight.  Similarly, Tyler Cowen argues that administrative costs are efficient if they pay for themselves by reducing unnecessary spending.

Today’s New York Times offers an illustration of how Medicare’s too-low administrative costs leads to waste:

Medicare spends billions of dollars each year on products and services that are available at far lower prices from retail pharmacies and online stores, according to an analysis of federal data by The New York Times. The government agency has paid above-market costs for dozens of items, a comparison of Medicare figures with retail catalogs finds.

For example, last year Medicare spent more than $21 million on pumps to help older and disabled men attain erections, paying about $450 for the same device that is available online for as little as $108. Even for a simple walking cane, which can be purchased online for about $11, the government pays $20, according to government data.

These widespread price discrepancies, including those for oxygen services, have been noted in dozens of regulatory reports.

Private insurers incur administrative costs to make sure they (and their customers) aren’t getting ripped off.  Medicare doesn’t.  The Times article also illustrates why Medicare usually can’t:

[W]hen officials and politicians have tried to cut these costs, they have often encountered a powerful foe: the companies that sell these devices, who ask their elderly customers to serve, in effect, as unpaid lobbyists, calling and writing to their representatives in Congress, protesting at rallies, and even participating in political attacks against individual lawmakers who take on the issue.

“These industries rely on a basic threat: If you mess with us, we can turn the seniors against you,” said former Senator Alan K. Simpson, Republican of Wyoming, who tried cutting Medicare payments while he was in Congress…

Many of those battles focus on the $427 billion Medicare program. Because of fierce patient and corporate lobbying, for instance, Medicare still pays prices for many items that are based on rates established in the early 1980s, when devices were often much more expensive than they are now.

Even as the actual cost of many machines and services has fallen, Medicare has only occasionally lowered what it pays.

To argue for single-payer on the basis of Medicare’s administrative costs is the equivalent of arguing that, because I can set fire to a pallet of $100 bills with a cigarette lighter and a can of gasoline, I should be entrusted with even more pallets of cash because my administrative costs are such a small share of the money involved.

So staggeringly efficient, this Medicare.

More Nanny-State Foolishness

Article I, Section VIII of the United States Constitution specifies the powers of the United States Congress. The list of congressional powers is not very long, comprising less than 20 items, so it did not take very long to discover that federal lawmakers do not have any power to regulate school lunches. So I was shocked, absolutely shocked, to read in the New York Times that Senators Harkin and Murkowski are pushing legislation to micro-manage the number of calories in vending-machine snacks (though they have graciously and generously decided to exempt the Girl Scouts):

Federal lawmakers are considering the broadest effort ever to limit what children eat: a national ban on selling candy, sugary soda and salty, fatty food in school snack bars, vending machines and cafeteria lines. …Senator Tom Harkin, Democrat of Iowa and the chairman of the Agriculture Committee, has twice introduced bills to deal with foods other than the standard school lunch, which is regulated by Department of Agriculture. Several lawmakers and advocates for changes in school food believe that an amendment to the $286 billion farm bill is the best chance to get control of the mountain of high-calorie snacks and sodas available to schoolchildren. Even if the farm bill does not pass, Mr. Harkin and Senator Lisa Murkowski, Republican of Alaska, a sponsor of the amendment, vow to keep reintroducing it in other forms until it sticks. …Food for sale would have to be limited in saturated and trans fat and have less than 35 percent sugar. Sodium would be limited, and snacks must have no more than 180 calories per serving for middle and elementary schools and 200 calories for high schools. The standards would not affect occasional fund-raising projects, like Girl Scout cookie sales.

Why Do European Politicians Want Tax Harmonization?

While it is possible that European politicians have a genetic predisposition for statist policies, I’ve never thought this is why they support tax harmonization. Self interest is a far more reasonable answer. More specifically, European nations generally have high fiscal burdens. For instance, government spending consumes nearly half of economic output in EU countries, compared to one-third of GDP in the United States.

Not surprisingly, this translates into a higher tax burden, which means jobs and investment generally flee Europe. Tax harmonization is an attempt to stop labor and capital from escaping by creating, for all intents and purposes, a “fiscal fence.” But European politicians also want to undermine tax competition because they know the situation is going to get worse. According to a new report, demographic changes almost certainly are going to result in an even bigger welfare state in the future. This means increasingly harsh tax rates on the remaining productive people - which means politicians will try even harder to prevent taxpayers from escaping. The EU Observer reports on the key statistic that is causing angst for Europe’s political class:

According to demographic predictions, the EU’s population will not only shrink by almost 20 million people by 2050, but its make-up will also change dramatically. While there are currently about four working people of working age for each person of pension age in the EU’s 27 member states, there will be fewer than two people to support every elderly person by 2050, with the population gradually ageing.

The Politics of Free Speech Change for the Better

The politics of free speech are changing fast.

The presidential public financing system is all but dead, largely because the candidates are raising so much money they don’t need to dun the taxpayers for campaign cash. The Democrats have raised a lot more money for the coming election than the Republicans. The Supreme Court is starting to favor free speech in campaign finance cases and casting a cold eye on laws like McCain-Feingold.

For most of the past three decades, so-called “reform” groups have dominated DC battles about campaign finance. These special interest groups lobbied Congress while their lawyers practiced the art of restricting speech before the Federal Election Commission.

Now that too is changing. A new group, SpeechNow.org, has formed to fight restrictions on speech. They just asked the Federal Election Commission to issue an advisory opinion about whether their fundraising must follow the contribution limits in federal election law.

Contribution limits exist–in law, if not in fact–to prevent corruption or the appearance of corruption. But SpeechNow.org is not giving money to federal candidates for office, and it is not incorporated (corporations cannot legally give money to parties or candidates). The organization is funded solely by individuals, some of whom want to give more than $5,000 to support the work of the new group.

What are they planning to do? The Center for Competitive Politics, which along with the Institute for Justice provides legal counsel to SpeechNow.org, says that “the group wants to run TV ads supporting and opposing candidates on free speech issues during the 2008 election cycle.”

Think about that for a minute. A group of citizens wants to come together to pool their resources to speak out for and against candidates on matters concerning free speech. They don’t plan to give candidates or the parties money, so the corruption threat does not exist. What could be more in line with the First Amendment and the Constitution? And yet… SpeechNow.org finds itself asking the Federal Election Commission “mother may I?” just to exercise its constitutional rights.

That should make you angry.

But think about this too. SpeechNow.org is something different from what we’ve heard on these issues for so many years, a group that plans to defend the First Amendment outside the courtroom. And somewhere in this nation is at least one person who is willing to give SpeechNow.org more than $5,000 for that effort.

That gives me hope.

Should the Government Have a Monopoly on Money?

Writing for the New Republic, Alvaro Vargas Llosa asks the fundamental question of whether the Federal Reserve has been a net plus or a net minus for the American economy. Looking at the Fed’s track record, which includes disasters like the Great Depression and serious mistakes like the more recent high-tech and housing bubbles, Llosa astutely wonders whether money is too important to be left in the control of government:

Some of the country’s greatest economists, including Nobel Prize winners, have been saying for years that the Federal Reserve has probably caused more problems than it has solved since its creation in 1913. Its role in the last century’s boom and bust cycles is a matter of record; it looks as though it played a similar role in the current housing market crisis too. While the creation of the Federal Reserve was essentially a response to a series of bank runs, those crises were mild compared to the ones that were to follow. … All in all, financial instability has been far greater since the creation of the Federal Reserve. What did the Great Depression teach us? Essentially that even with the best of intentions, it is impossible for the authorities to manage the supply of money in accordance with the exact needs of the economy. A country’s economy is the sum of millions of people making decisions that no single individual is in a position to anticipate. … The current housing market and debt market crises are in good part the children of the Federal Reserve. By cutting rates 13 times between 2001 and 2003, and then keeping them very low for years, monetary policy contributed to the housing bubble. …once again, the Fed has turned out to be a factor of financial instability.

How Much Defense Spending Is Enough?

Over at the National Interest, my boss Ted Carpenter has been slugging it out with former senator Jim Talent over (originally) Fred Thompson’s proposal to spend 4.5% of GDP on defense.

Ted notes correctly that we already spend as much on defense as the rest of the world combined, but Sen. Talent is nonplused. To the contrary, he protests that

the Navy must buy new DDG-1000 destroyers, ramp up procurement of Virginia-class submarines, and buy large numbers of littoral combat ships and the next-generation cruiser. The Air Force must buy its new superiority fighter, the F-22, as well as Joint Strike Fighters or equivalent aircraft and additionally fund its strategic-airlift requirement, design and build a new tanker and develop an interdiction bomber to replace the B-52. The Army must modernize and replace almost its entire capital stock of fighting vehicles.

How does Ted oppose doing the things Sen. Talent says we “must” do? Because, according to Talent, he

ignores the risks created by: the collapse of democracy in Russia, the rapid growth of Chinese power and the reemergence of Chinese national ambitions, the proliferation of nuclear weapons to rogue states and unstable governments, the rise of Islamic fanaticism empowered by the tools of asymmetrical warfare, and the intense ethnic and religious rivalries that have led to genocide on a vast scale in Europe, Africa and Asia in the last twenty years.

This is an interesting exercise in bait-and-switch. So the justifications for buying new battleships, the Joint Strike Fighter, and a new bomber are supposed to include all of these things? How is the Joint Strike Fighter going to deal with the collapse of democracy in Russia? How would new battleships help us deal with nuclear proliferation? And how would a new bomber help us deal with “the rise of Islamic fanaticism empowered by the tools of asymmetric warfare” or “the intense ethnic and religious rivalries that have led to genocide on a vast scale in Europe, Africa and Asia in the last twenty years”?

The only plausible case Mr. Talent could be making is that we should be preparing these tools because ultimately we’re going to have a shooting war with the Chinese. And indeed, if one were inclined to look seriously at the prospect of a shooting war with the Chinese, many of these tools are ones you’d like to have. Then again, a shooting war with the Chinese would also collapse the global economy and possibly have macroeconomic effects that would be felt for decades. Also, a lot of people would die.

Alternatively, if we’re going to get ourselves ready to replicate our experience in Iraq with Iran, the responsible thing to do would be to scrap a lot of these technologies and invest heavily (and quickly!) in a large-scale expansion of the ground forces. The men and women who have taken orders from this administration in the Army and Marine Corps have served valiantly, but they aren’t supermen. At some point, those who advocate endless wars in the Middle East (to be fair, I’m not sure what Sen. Talent’s views are on the Iran question) are going to have to decide which is more important: these large-ticket defense items, or equipping the DOD with the tools it needs to enact the strategies given it by the political leadership in this country.

Alternatively, we could spend 10 or 12 percent of GDP on defense, but I haven’t heard that proposal floated in serious quarters. Another alternative would be to continue initiating wars in the Middle East, continue preparing for war with China, and continue all of the other security commitments America has taken on in the past decades, on what would be the shoestring budget of 4.5 percent of GDP, inadequate to support any of these policies sufficiently.

It’s not clear how Sen. Talent proposes to deal with these tradeoffs, but what’s certainly unhelpful is pretending that the DDG is a workable solution to proliferation. In addition, given that he throws around accusations of “weakening” the United States as opposed to a “strong” United States, it’s worth observing that the charge is coming from a proponent of the current war, which has done more than anything in 40 years to weaken our country.

For a much sounder assessment of where we are and where we should go, see Richard Betts’ article in the current Foreign Affairs, “A Disciplined Defense.”

The Right Way to Engage China

The United States and China reached an agreement yesterday on a dispute over alleged Chinese export subsidies. In exchange for the U.S. government dropping a case it was pursuing through the World Trade Organization, China agreed to end subsidies that the U.S. claimed were promoting exports and hindering imports of steel, wood, IT products, and other manufactured goods.

Details of the case aside, the announcement shows how trade disputes with China can be resolved without resort to threats of retaliatory tariffs. This is not the first time China has changed its trade laws in response to pressure from the United States through the WTO. In 2004, China dropped a discriminatory tax refund on domestically produced semiconductors after the U.S. government filed a complaint.

Today’s announcement is another vindication of resolving trade disputes with China through a rules-based system rather than through threats of unilateral retaliation. China’s accession to the WTO in 2001 not only committed China to lowering trade barriers on a broad range of goods and services; it also brought China into the generally effective WTO dispute settlement mechanism.

In two weeks, Treasury Secretary Paulson, U.S. Trade Representative Susan Schwab and other cabinet members will meet with their Chinese counterparts in Beijing as part of the ongoing Strategic Economic Dialogue. As today’s announcement verifies, the SED represents the right approach to encouraging China to continue its evolution toward a more free and open economy.