Physician Shrugged

My good friend Adam Cohen writes about his doctor’s perspective on health care “reform.” It’s a tremendous piece and fair warning.

As it happens, Adam had a terrible sports injury that necessitated immediate treatment by one of the best orthopedic surgeons in the world. Luckily, Adam lives in New York City and was able to find the quality of care that his injury demanded. Had he lived elsewhere he might not have been so lucky. Had he lived in a country where the government provides health care, he would simply have been denied effective treatment. (Read the piece for an example of such a denial of adequate care.) The expertise and skill of Adam’s doctor has enabled Adam to walk. This is what the doctor had to say,

If they socialize medicine, if doctors are salaried primarily by the government, if standards of care are developed to control costs and imposed on physicians, which is what they intend, then the quality of medical care in America will be downgraded and patient outcomes will worsen. I won’t help a self-defeating system pretend that it’s workable. I won’t be any part of it.

How many others will walk away?


John Stossel explains the problem with Government run health care:

Medical care doesn’t grow on trees. It must be produced by human and physical capital, and those resources are limited. Therefore, if demand for health care services increases—which is Obama’s point in extending health insurance—prices must go up. But somehow Obama also promises, “I won’t sign a bill that doesn’t reduce health care inflation.”

This is magical thinking. Obama, talented as he is, can’t repeal the laws of supply and demand. Costs are real. If they are incurred, someone has to pay them. But as economist Thomas Sowell points out, politicians can control costs—by refusing to pay for the services.

It’s called rationing.

Advocates of nationalization hate that word because it forces them to face an ugly truth. If government pays for more people’s health care and wants to control costs, it must limit what we buy.

So much for Obama’s promise not to interfere with our freedom of choice.

This brings us back to end-of-life consultation. As the government’s health care budget becomes strained, as it must—and, as Obama admits, already is under Medicare—the government will have to cut back on what it lets people have.

So it is not a leap to foresee government limiting health care, especially to people nearing the end of life. Medical “ethicists” have long lamented that too much money is spent futilely in the last several months of life. Are we supposed to believe that the social engineers haven’t read their writings?

And given the premise that it’s government’s job to pay for our heath care, concluding that 80-year-olds should get no hip replacements makes sense. The problem is the premise: that taxpayers should pay. Once you accept that, bad things follow.

In the end, perhaps the biggest objection to nationalized health care is the “principal-agent problem.” For whom does the doctor work? Ordinarily, the doctor is the agent of the patient. But when government signs the checks and orders doctors to reduce spending, it is not crazy to think that this won’t influence their “advance care planning consultation.”

Right, but Wrong

From Hot Air:.

Rep. Anthony Weiner (D-NY) returned to the ObamaCare battle on MS-NBC’s Morning Joe today, preaching the public-plan gospel just as he did yesterday on CNBC. However, this time, Joe Scarborough goaded Weiner into a little more honesty than he’s offered on the effort to “reform” health care. Declaring that “health care is not a commodity,” Weiner says his aim is to eliminate all private insurance — which is why he will not yield on the public-plan option.

Weiner repeatedly says “health care is not a commodity.” The article tries to refute this by saying that anything with a cost is a commodity… but that’s not really true. Health care is a service, health insurance is a good, and aspirin is a commodity.

The essential characteristic of a commodity is fungibility. We say that X has been commodified if there is little to no difference between the utility of the product across suppliers. That’s obviously not true of services. The utility (quality, effectiveness, price…) of health care depends on the abilities of individual health care providers.

So Weiner is right. Health care is not a commodity. It’s a service.

But what does that mean for the “reform” debate?

Does it mean that we should try to treat health care as a fungible commodity? Or does it mean that we should respect the individual services provided and work to improve the quality and availability of those services?

If we work to eliminate private insurance (a good that increases utility by spreading risk) and force all service providers to negotiate with a single payer (a monopsony) then we are saying that while Health care is not a commodity, we sure wish that it was.

The monopsony power of a single payer system works to bring the price of the good/service in question down. But good intentions don’t exempt markets from economics. Prices cannot be arbitrarily lowered without affecting supply. In the case of services, especially in the case of capital intensive services (where the providers require years nad years of expensive training), monopsony price controls result in an overall reduction of the supply and quality of available services. Expensive services are eliminated and the numbers of service providers dwindle in response to market pressures.

Finally, because monopsony power in health care generally fails to distinguish between the quality of health providers (every doctor is paid a fixed amount per procedure), it reduces the incentives for providers to improve the marginal quality of their work.

Weiner also asks, “What is [the health insurer’s] value? What are [the health insurers] bringing to the deal?”

This is, I think, a common concern. It doesn’t seem as though health insurers do very much other than collect large premiums and deny coverage. Partly this is because for the average American, the actual cost of health care is a mystery. $20 co-pays and $8 prescription fees mask the actual cost of providing those services. Health insurance hasn’t actually been insurance for a long time. For most of us, the bulk of our annual health care costs are paid for directly out of our premiums. What would otherwise have been deductible expenses are simply front-loaded in higher premiums. Since we often don’t see actual health care bills (until payment has been denied!) we don’t get that the money we’ve paid as premiums has actually been used as a deductible.

But there’s another reason why I think we’ve come to distrust health insurers (in a way that we don’t distrust our flood insurance providers or our fire insurers): health insurance has in many ways already acquired a kind of monopsony power. Because we have so tilted the tax codes to favor employer provided coverage, health insurance has become structured around actuarial pools (an employer’s workers) that are in many ways arbitrary. Sensible regulation concerning privacy and portability has meant that insurers have had a harder time finding accurate actuarial tables against which to price health insurance, which increases the cost of insurance. Additionally, employer provided insurance has mean that a disproportionate amount of purchasing power has been placed in the hands of insurers with large group policies. The insurer who covers 40% of a community’s workforce, for example, is in a strong position to dictate prices to providers. (But as I’ve said, that power comes with a cost of its own: decreased supply and quality.)

In essence, when you buy your health insurance through your employer, you’re trying to treating health care as a commodity! The insurer packages your care with the care all your coworkers will receive into a big bundle, prices the total bundle of services, and then splits the cost more or less evenly among the subscribers. That’s treating individual services as a kind fungible commodity. If health insurance were really insurance–with reasonable deductibles–then this kind of packaging would work primarily to spread risk, but since we’ve increasingly started using premiums to pay for maintenance and routine care, we’re not so much spreading risk as we are spreading cost–and ultimately–quality.

The solution to this mess is to stop treating health care as a commodity. Increase the number of insurers, increase the numbers of providers. Extend the health care tax deduction to individuals and allow insurance companies to package products that account for real actuarial differences. Increase deductibles, reduce premiums, and extend catastrophic insurance.

The solution to monopsony power is not to increase the power of the monopsony. The solution to a commodification of services is not to increase the commodification of those services. The solution is to increase the number of players in the market and allow specialization, competition, and innovation to increase product differentiation and serivce quality.

Weiner’s right, health care isn’t a commodity. But he’s wrong to try and treat it as one.

An Axelrod to grind

I got an email from David Axelrod today. Since he asked me to forward it, I’m including the substantive portion below with my own comments included.

8 ways reform provides security and stability to those with or without coverage

  1. Ends Discrimination for Pre-Existing Conditions: Insurance companies will be prohibited from refusing you coverage because of your medical history.
    Whatever you feel about this, it dramatically increases costs. I know we abandoned any sense of treating health insurance as… insurance… a long time ago, but I’ll repeat: insurance simply cannot be profitable (or manageable if it can’t make use of actuarial analysis. Should we also demand that home insurance cover damages that were sustained before the policy was written?
  2. Ends Exorbitant Out-of-Pocket Expenses, Deductibles or Co-Pays: Insurance companies will have to abide by yearly caps on how much they can charge for out-of-pocket expenses.
    This is absurd. All it does is increase premiums. No cost savings, no net benefit in health coverage, it’s shifting the accounting in an attempt to fool people.
  3. Ends Cost-Sharing for Preventive Care: Insurance companies must fully cover, without charge, regular checkups and tests that help you prevent illness, such as mammograms or eye and foot exams for diabetics.
    See above. Another pointless accounting measure that increases premiums. There’s a significant downside to this kind of cost masking: forcing insurance to cover “preventive” care upfront and without co-pay will result in the insurance companies capping the number and kind of “preventive” visits that they’ll cover. This is back-door service rationing, nothing more.
  4. Ends Dropping of Coverage for Seriously Ill: Insurance companies will be prohibited from dropping or watering down insurance coverage for those who become seriously ill.
    In practice this means that insurance companies will be prohibited from capping the total amount of individual liability. Again, it’s an effort to force insurance to abandon actuarial analysis, which makes insurance impossible. Again, imagine an insurance company trying to assess the risk of insuring homes against fire when the potential financial exposure on each home is essentially unlimited? No fire insurance.
  5. Ends Gender Discrimination: Insurance companies will be prohibited from charging you more because of your gender.
    Again, an attempt to ignore actuarial evidence.
  6. Ends Annual or Lifetime Caps on Coverage: Insurance companies will be prevented from placing annual or lifetime caps on the coverage you receive.
    All of these attempts to end-run the actuarial tables only serve to make private insurance impossible. These are provisions that will destroy the private insurance market. That’s their purpose and aim, no other. The cost increases that would result from these provisions would be impossible to absorb.
  7. Extends Coverage for Young Adults: Children would continue to be eligible for family coverage through the age of 26.
    Why not 86? Because young adults are the population that consumes the least amount of health care. They’re also the most likely to not have insurance. By extending family coverage to young adults, the premiums that would otherwise be lost are captured. Since there’s no attempt to mean-test any of these proposals, this acts simply as a yet another tax on the young to support the aging.
  8. Guarantees Insurance Renewal: Insurance companies will be required to renew any policy as long as the policyholder pays their premium in full. Insurance companies won’t be allowed to refuse renewal because someone became sick.
    I’m not sure how this differs from point 4, above. I’m not also sure how it’s legal. A contract that cannot be terminated is not a contract, it’s servitude.

8 common myths about health insurance reform

  1. Reform will stop “rationing” – not increase it: It’s a myth that reform will mean a “government takeover” of health care or lead to “rationing.” To the contrary, reform will forbid many forms of rationing that are currently being used by insurance companies.
    The full frontal assault on actuarial analysis will require insurance companies to ration all the coverage that they’re forbidden to charge co-pays and deductibles on. For as long as they can manage to stay in business at all that is. But public insurance isn’t magically exempt from the laws of economics and nature, the only way to increase liability limits while abandoning actuarial analysis is to decrease coverage.
  2. We can’t afford reform: It’s the status quo we can’t afford. It’s a myth that reform will bust the budget. To the contrary, the President has identified ways to pay for the vast majority of the up-front costs by cutting waste, fraud, and abuse within existing government health programs; ending big subsidies to insurance companies; and increasing efficiency with such steps as coordinating care and streamlining paperwork. In the long term, reform can help bring down costs that will otherwise lead to a fiscal crisis.
    This is just a lie. Obama promised the same thing about the rest of his agenda. The result? $100 million in “waste cutting.” $100 million out of a $3 trillion budget. You simply cannot radically increase obligations and not radically increase costs. The government is notoriously–and necessarily–wildly less efficient than the private sector.
  3. Reform would encourage “euthanasia”: It does not. It’s a malicious myth that reform would encourage or even require euthanasia for seniors. For seniors who want to consult with their family and physicians about end-of life decisions, reform will help to cover these voluntary, private consultations for those who want help with these personal and difficult family decisions.
    This is correct. There is no euthanasia requirement, unless it’s euthanasia by prolonged exposure to crippling debt. But really, why put the “end of life” consultations in the section of the bill addressing cost reduction strategies?
  4. Vets’ health care is safe and sound: It’s a myth that health insurance reform will affect veterans’ access to the care they get now. To the contrary, the President’s budget significantly expands coverage under the VA, extending care to 500,000 more veterans who were previously excluded. The VA Healthcare system will continue to be available for all eligible veterans.
    I haven’t seen any criticism of the proposals because of the negative effects it might have on the VA. I have seen a number of rather frightening reports of incompetence and cost overruns in the VA that belie the idea that the Feds have the competence to run a national health care system. I will also add that it’s indisputably our responsibility to provide veterans with health care. Got no beef with me on that score. I just wish the VA were better managed and provided better care.
  5. Reform will benefit small business – not burden it: It’s a myth that health insurance reform will hurt small businesses. To the contrary, reform will ease the burdens on small businesses, provide tax credits to help them pay for employee coverage and help level the playing field with big firms who pay much less to cover their employees on average.
    Why not extend the tax benefits to individuals as well? Why not just make health costs deductible below the line? Add a means-tested credit for insurance premiums and maybe vouchers for preventive care and call it a job well done?
  6. Your Medicare is safe, and stronger with reform: It’s myth that Health Insurance Reform would be financed by cutting Medicare benefits. To the contrary, reform will improve the long-term financial health of Medicare, ensure better coordination, eliminate waste and unnecessary subsidies to insurance companies, and help to close the Medicare “doughnut” hole to make prescription drugs more affordable for seniors.
    And it will make your teeth white, ease the pain of heartbreak, and give your car that fresh-from-the-dealer smell. If they won’t finance it with Medicare cuts, how the hell will they finance it?
  7. You can keep your own insurance: It’s myth that reform will force you out of your current insurance plan or force you to change doctors. To the contrary, reform will expand your choices, not eliminate them.
    Page 16 of the bill in the House committee contains a provision that makes individual health insurance illegal. Also, when your private insurers goes bust because they’ve made it illegal to price insurance (that’s the actuary’s job), your insurance will change.
  8. No, government will not do anything with your bank account: It is an absurd myth that government will be in charge of your bank accounts.  Health insurance reform will simplify administration, making it easier and more convenient for you to pay bills in a method that you choose.  Just like paying a phone bill or a utility bill, you can pay by traditional check, or by a direct electronic payment. And forms will be standardized so they will be easier to understand. The choice is up to you – and the same rules of privacy will apply as they do for all other electronic payments that people make.
    What??? The government will be in charge of the privacy of my health insurance payments?? WTF? The government in charge of privacy??

8 Reasons We Need Health Insurance Reform Now

  1. Coverage Denied to Millions: A recent national survey estimated that 12.6 million non-elderly adults – 36 percent of those who tried to purchase health insurance directly from an insurance company in the individual insurance market – were in fact discriminated against because of a pre-existing condition in the previous three years or dropped from coverage when they became seriously ill.
    First, these numbers aren’t accurate. Why aren’t these people on Medicaid? Don’t we already have a program for the uninsurable? Even if we accept this as a problem, shouldn’t we address this problem rather than devise a program to ensure that no one is privately insured?
  2. Less Care for More Costs: With each passing year, Americans are paying more for health care coverage. Employer-sponsored health insurance premiums have nearly doubled since 2000, a rate three times faster than wages. In 2008, the average premium for a family plan purchased through an employer was $12,680, nearly the annual earnings of a full-time minimum wage job.  Americans pay more than ever for health insurance, but get less coverage.
    Get less coverage? Not true. That would be true if premiums had increased faster than payouts, but they haven’t. According to the National Coalition on Health Care, premiums rose 5% in 2008 while expenditures rose 6.9%. Yes, that means that with each passing year, Americans are getting more coverage for less premium.
  3. Roadblocks to Care for Women: Women’s reproductive health requires more regular contact with health care providers, including yearly pap smears, mammograms, and obstetric care. Women are also more likely to report fair or poor health than men (9.5% versus 9.0%). While rates of chronic conditions such as diabetes and high blood pressure are similar to men, women are twice as likely to suffer from headaches and are more likely to experience joint, back or neck pain. These chronic conditions often require regular and frequent treatment and follow-up care.
    So, they’re saying that women cost more to care for than men, and while we should pay close attention to that fact as a reason to support the administration’s proposals, we should ignore that fact when it comes to price actual care. Maybe we should be looking at ways that we could reduce the costs of chronic care for men and women?
  4. Hard Times in the Heartland: Throughout rural America, there are nearly 50 million people who face challenges in accessing health care. The past several decades have consistently shown higher rates of poverty, mortality, uninsurance, and limited access to a primary health care provider in rural areas. With the recent economic downturn, there is potential for an increase in many of the health disparities and access concerns that are already elevated in rural communities.
    But how is destroying the private insurance market supposed to help rural America? From John Goodman,

    Access to health care in single-payer systems is far from equitable; in fact, it often correlates with income—with rich and well-connected citizens jumping the queue for treatment. Democratic political pressures (i.e., the need for votes) dictate the redistribution of health care dollars from the few to the many. In particular, the elderly, racial minorities, and those in rural areas are discriminated against when it comes to expensive treatments.

  5. Small Businesses Struggle to Provide Health Coverage: Nearly one-third of the uninsured – 13 million people – are employees of firms with less than 100 workers. From 2000 to 2007, the proportion of non-elderly Americans covered by employer-based health insurance fell from 66% to 61%. Much of this decline stems from small business. The percentage of small businesses offering coverage dropped from 68% to 59%, while large firms held stable at 99%. About a third of such workers in firms with fewer than 50 employees obtain insurance through a spouse.
    Systematically increasing premiums is not the way to help small businesses. Extend the tax deduction to individuals.
  6. The Tragedies are Personal: Half of all personal bankruptcies are at least partly the result of medical expenses. The typical elderly couple may have to save nearly $300,000 to pay for health costs not covered by Medicare alone.
    So we should make personal tragedies political? Again, this argues for addressing concerns and problems with Medicare, but it provides no justification at all for assaulting everyone’s coverage. Medical costs can be extraordinary, to be sure. The way to decrease costs and increase availability is through competition, innovation, and wealth generation. The point isn’t that we don’t want Grandma and Granddad to pay $300,000 for medical care, it’s that we should want them to be able to pay it.
  7. Diminishing Access to Care: From 2000 to 2007, the proportion of non-elderly Americans covered by employer-based health insurance fell from 66% to 61%. An estimated 87 million people – one in every three Americans under the age of 65 – were uninsured at some point in 2007 and 2008. More than 80% of the uninsured are in working families.
    There’s a key point in these absurd numbers, “at some point.” If you changed jobs and were uninsured for a day, or if you adjusted coverage at your job and the old policy ended before the new policy began, you were “uninsured.” This is an especially weaselly lie as regulations dictate the manner and nature in which co-insurance policies are written, so if you change jobs, or substantially revise your primary insurance, you must–by law–be uninsured “at some point.” This is an abuse of statistics designed simply to scare people.
  8. The Trends are Troubling: Without reform, health care costs will continue to skyrocket unabated, putting unbearable strain on families, businesses, and state and federal government budgets. Perhaps the most visible sign of the need for health care reform is the 46 million Americans currently without health insurance – projections suggest that this number will rise to about 72 million in 2040 in the absence of reform.
    First, increased health care expenditures are a good thing. We don’t want to reduce our health care expenditures, we want to spend more on health care! The truly disturbing trend would be an annual reduction in health care expenditures, that would certainly mean that we’re getting less care, less innovation, and less health. Is everything hunky-dory and peachy-keen? No. But the reforms on the table are not improvements. Should we do something? Yes. But doing something doesn’t mean doing anything. We should do something, but we should do something smart. Extend the tax deduction. Let’s talk about means-tested health-care vouchers and tax credits. Let’s talk about catastrophic coverage and actuarial pools. Let’s talk sense.

Comingled Compartments

Shannon Love has an interesting post up about The Dangers of Decompartmentalized Health Care Spending over at (HT Instapundit).

Her point is simple,

Right now we compartmentalize government health-care spending. We have one program for the poor (Medicaid) and one for the elderly (Medicare). Each is paid for by a separate flat tax on wages. The government doesn’t spend any money on health care for the middle class. This means that if the government spends more money on health care for the poor it doesn’t automatically mean they spend less on the elderly. More importantly, it means that when the government spends more on the poor or elderly it doesn’t directly mean middle-class families have less spent on them. Middle-class families might see their payroll taxes go up but they can compensate by trimming spending in all of their budget areas. Those taxes don’t come directly out of their health-care budgets. With the current system, health-care spending is a nonzero-sum game, i.e., spending more on one compartment does not automatically mean spending less on another compartment. …

The elderly consume 70% of all health-care spending. That means that when it comes to cost control they will bear the brunt of the burden. If we don’t cut spending on the elderly we can’t reduce costs without simply denying care for everyone else. When it comes down to a choice between spending on old people and children, the elderly know full well who we are going to pick. …

We should think long and hard before we set up a political dynamic that pits the interests of the productive and powerful against the interests of the non-productive and powerless. It is unwise to make people choose between care for their own children and care for their parents and poor strangers. The current compartmentalization, flawed at it is, at least protects the most vulnerable people from this fate. We can pay for medical care for the poor and elderly, without compromising the level of care for our children or reducing any other government function.

Her point is simple, and she illustrates a central problem with the politicalization of health-care spending, but she, like a great many observers, misses a central point: All government spending is zero-sum.

Dollars are fungible and increased spending on Medicare or Medicaid necessarily means that taxpayers (present or future) have less to spend on their own health-care. There is no real sense in which taxes are taken from some part of a household budget and not other parts. Separating Medicare and Medicaid out into distinct budgetary entities allows us to track expenditures and surely allows us to prioritize spending and allocate our dollars, but that “compartmentalization” is a matter of accounting, nothing more.

Ms. Love is correct that the elderly will bear the brunt of any effort to constrain government health care spending, but that’s true regardless of whether or not the expenses are “commingled” in a budget line-item. The dangers she cites are as relevant under the current system as they are under the proposed (whichever variant you pick) system.

She says that it’s “unwise to make people choose between care for their own children and care for their parents and poor strangers.” But that’s nonsense. Our capacity, both as individuals and collectively, is limited. We do not have infinite reserves of money or capital or wealth, we must choose how to spend our money and when it comes to health care. If our reserves fall and costs rise then we must–and we do–choose between care for our children, care for ourselves, and care for strangers. Just as we choose between care for our children and a new car.

The only reason this doesn’t appear to most of us in our personal lives is that we don’t usually perceive personal comparative choices as being undue burdens or necessarily sacrificial. I don’t see the premium I pay for health insurance in terms of lost vacation days because I choose that expenditure and approve of its use. I like having health insurance more than I like vacation days.

But what if I am no longer the arbiter of those personal decisions? What if the ability to decide between vacation days and health care is taken away from me? What if that decision becomes politicized? Then I’m faced with a scenario where someone else, for reasons that have no bearing on my family’s welfare (but are far too often predicated on vote maximization) decides that it would be better for them if I had more vacation and less health care. Or more likely, that supporting poor strangers is a better use of my income than my vacation–or the health of my own parents, or my own children.

The problem is not that we have to make decisions about where to spend our money, the problem lies in who has the power to make those decisions. So long as we cede that intimate authority to government, then decisions regarding who merits what level of care is a political decision, and all political decisions are zero-sum.

This doesn’t necessarily mean that society can’t reasonably afford some degree of social insurance, although it does mean that whatever form that social insurance takes, the decisions about how that insurance is distributed will be made according to a political calculus that operates under its own rules for its own benefit. The greater the reach and scope of that social insurance, the more severe those political choices become.

The Broken Clunker Fallacy

Shikha Dalmia has an article in Forbes detailing the hidden costs of the Cash for Clunkers program.

Some excerpts:
One, even if one accepts LaHood’s numbers, the fuel savings add up to only 72 million fewer gallons of gasoline every year–about what Americans consume in four and a half hours. This translates into 700,000 tons fewer carbon dioxide emissions annually–about what Americans emit every 57 minutes. …

the program might severely disrupt the ability of the used-car market to recycle parts, producing all kinds of negative unintended consequences for the environment. (Where is the green obsession with recycling when you need it?) The engine, combined with the drive train, accounts for about 35% of the value of the used car. But with this destroyed, it will make far less sense for recyclers to incur the cost of cleaning up mercury and other toxins to mine the remaining parts from the discarded vehicle. The upshot is that the car is more likely to land in scrappage with many valuable parts–engine, pistons, brakes–still intact. …

So, to recap, the Cash for Clunkers plan involves restoring the economy by destroying wealth and healing the environment by destroying resources. By this logic, we should use the stimulus money to fund a new Godzilla brigade to mow down the country and rebuild it in a more environmentally friendly way. Imagine how much richer and cleaner the planet would be.

This is about as classic an example of the broken window fallacy as you can imagine.

It’s a program built around a theory of economic stimulation that was debunked in 1850.


Jeffrey Rogers Hummel’s article, “Why Default on U.S. Treasuries is Likely,” is troubling.

In it, he argues that inflation alone won’t be enough to compensate for the coming Social Security/Medicare budgetary shortfall and that Treasury will instead repudiate a large portion of its debt. I recommend reading the whole thing.

Defaulting on our debt would be bad.

Right now, U. S. treasury bills are traded as essentially “risk free” investments. They form the backbone of the global financial system.

He closes the article with this:

All the social democracies are facing similar fiscal dilemmas at almost the same time. Pay-as-you go social insurance is just not sustainable over the long run, despite the higher tax rates in other welfare States. Even though the United States initiated social insurance later than most of these other welfare States, it has caught up with them because of the Medicare subsidy. In other words, the social-democratic welfare State will come to end, just as the socialist State came to an end. Socialism was doomed by the calculation problem identified by Ludwig Mises and Friedrich Hayek. Mises also argued that the mixed economy was unstable and that the dynamics of intervention would inevitably drive it towards socialism or laissez faire. But in this case, he was mistaken; a century of experience has taught us that the client-oriented, power-broker State is the gravity well toward which public choice drives both command and market economies. What will ultimately kill the welfare State is that its centerpiece, government-provided social insurance, is simultaneously above reproach and beyond salvation. Fully-funded systems could have survived, but politicians had little incentive to enact them, and much less incentive to impose the huge costs of converting from pay-as-you-go. Whether this inevitable collapse of social democracies will ultimately be a good or bad thing depends on what replaces them.

Only four things can happen when the bills come due:

1)  We can raise taxes to cover the shortfall.

This is problematic for several reasons. Revenue does not increase linearly with tax rates and higher tax rates reduce growth rates which further reduces revenue. The target rates, as Hummel points out, would need to be in excess of 45%, a level that far exceeeds anything Americans have shown a willingness to put up with. I think this is a political non-starter. Taxe rates would have to climb across the board and I don’t see any politician in the next twenty years seriosuly campaigning to double the taxes on middle-class earners.

2) We can cut benefits and services, end Social Security and radically reduce Medicare commitments.

Political suicide. No politician will do it. Won’t happen.

3) We can radically inflate the money supply.

Hummel argues that we actually can’t do this because there’s so much private money in the world. I think he’s probably right, but I’ll offer another reason why we can’t do this, and it’s the same as the reasons we won’t do 1) or 2). It’s political suicide. Hyper-inflation affects everyone equally. Everyone’s wealth is reduced both here at home and abroad. Think this recession looks bad? Significant inflation would cripple the global economy.

4) We can repudiate some of our debt.

In other words, we’d just default on T-bills. But of course, we wouldn’t default on the T-bill rate, we’d default on particular T-bills. I’m guessing we’d default on debt obligations held by foreign banks and foreign governments. I’m also guessing that we’d be less likely to default on our debt obligations to Western Europe than we would be to default on our debt obligations to China.

The economic fallout of debt repudiation would be bad, very bad. We’d likely lose the dollar as the world’s reserve currency, some inflation would likely attend any debt default, and the global economy would take a significant hit. But the consequences would obviously be most dire for whoever holds the debt we choose to default on. How will our creditors respond?