A recent short piece by Joachin Chisano[1] which appeared in the African Executive (April 7, 2010), has as its title: Africa Deserves Better Leadership. The author’s main thesis revolves around the quality of leadership (or lack of leadership) in Africa. In his view, a “majority of Africa’s leaders are more of a liability than an asset to their countries. They are more interested in fulfilling their selfish personal ambitions than working for their people”. Mr. Chisano goes on to enumerate incidences where leaders short changed their countrymen (and countrywomen) and other leaders who put their people first and worked to improve their standard of living. Although the message is not new, it needs to be said and said often. Perhaps one day what has been said can be translated into action.
Everyone who is concerned in one way or another with Africa, whether as an active or a passive participant bemoans the prevalence of corruption, the blundering of rich resources, and the over presence of ethnic violence and mass killing.
Many articles and volumes have been written, speeches and advice have been given by African and non-African scholars, ordinary people and concerned citizens. But nothing suggested seems to have worked well. Nothing seems to penetrate the armors that shield corrupted leaders and/or corrupted citizens from the day of reckoning if such a day were indeed to come. As one of those scholars who came lately (I am not a development economist or engaged in regional studies) to the recognition that efforts, no matter how small, should be exerted so that we, the outsiders, could understand better why corruption persists, why leaders behave the way they do and above all why little seem to work or has been accomplished over decades of writing, speech giving and aid.
As I mentioned earlier, I did come lately as a concerned scholar about the progress of Africa (see the mission of the Institute for Economic Policy Studies, http://www.iespolicy.org/about.html). In addition, to IEPS conferences, the blog media offers me an outlet for airing out some of the problems and concerns I have about what is happening in the continent (see Ott’s Blog 2007-2010).
Two issues should be up front in addressing the leadership issue. A solution, a “viable” solution, must be found to deal with them otherwise, all writing and lecturing will be for knot. These two issues are: Length of executive tenure—how long the country leader stays in office—and corruption—especially external corruption. Let us look at these two issues starting with the length of tenure.
Citizens of the world are not unaware of the fundamental link between the institution of democracy and the length of the leader in office. In most democratic states, there is a “constitutional” limit on the tenure of the leader (president), but is absent or flaunted in non-democratic states. Many countries on the African continent have leaders “who won’t go”. This phenomenon was commented upon in an Economist’s piece: “Another President Who Won’t Go”. This piece in the Economist (March 15-17, 2008, pp 49-50) was in relation to a debate which was taking place in Cameroon regarding presidential tenure limits. The Economist reported that on February 24th and 25th , 2008, violent protests broke out in Douala, Cameroon’s commercial capital, in response to Cameroon’s President, Paul Biya’s declaration that he might stay for a third term of another 7 years. President Biya has presided over Cameroon for 25 years. The new constitution that came into force in 1996, limits the president to only two terms in office. For the president “not to go”, the constitution had to be changed. And as the story goes he did not go—Paul Biya still remains in office.
At the time this event was taking place, I wrote a blog (April 8, 2008) with the title “No, No, We Won’t Go: Why Some African President’s Refuse to Retire” (http://attiatott.blogspot.com/2008_04_01_archive.html). Old men in Africa, most of whom are in their late seventies or in their eighties have ruled for over two decades. Most of these rulers have come to power on the heel of independence or following the overthrow of dictators with the blessing of their citizens. Expectations ran high. But then expectations dimmed, hope dashed. What went wrong?
To be “scientific” one needs to examine a country by country experience. Two excellent books give an account of what has transpired: “The Fate of Africa From the Hopes of Freedom to the Heart of Despair: A History of 50 Years of Independence” (2005) by Martin Meredith, and “A Continent for the Taking: The Tragedy and Hope of Africa” (2004) by Howard W. French. The Ott’s Blog (2008) gives information on the relation between the ruler’s tenure and the Freedom House rating of freedom over the period of 1973-2006. The upshot of this analysis is to uncover the link between the state of democracy and the “won’t go” phenomenon. The findings are not unexpected: FREEDOM with all its ramifications is the most significant factor in determining the staying power of a ruler. Freedom is much more than conducting an election. It involves the guarantee of political rights and civil liberties. Few of these rights are guaranteed in many Sub-Saharan African countries. When elections are held, the current ruler most often either “wins not fairly and squarely”, the opposition either attacked, silenced or jailed (see French for examples).
There is a saying that “power corrupts”, and, the longer the tenure, the more power to the corrupt. So now I turn to the phenomenon of corruption.
Corruption and bad governance is as natural if not inevitable like birth and death. What makes us, more accurately, at least some of us “incorruptible” is civil education and good sense of what is in it for me vis a vis what is good for someone else. The concept of a leader as distinct from the people the leader is supposed to serve has evolved from being one of us, to one of himself. But what defines corruption and who is instigating the corrupt behavior?
There is a great deal of literature on corruption. For the sake of brevity it suffices to offer definitions for the two types of corruption: internal or domestic corruption and external corruption. The first type is relatively insignificant whereby an individual in one nation bribes an individual (most often a government official) in the same nation to facilitate action on an impending request. The second type, external corruption is the one talked about when the term corruption is used.
So what is it? External corruption arises as one individual or an official of one nation bribes another individual or an official of another nation.
Transparency International (1995) definition is one that is commonly used. It defines it as “abuse of public office for private gain”. Jain A., (2001), “Corruption: A Review”, Journal of Economic Surveys, 15(1): 71 -121 defines it as “an act in which the power of public office is used for personal gain”. In both definitions, what is stressed is who is being corrupted and for what purpose. Just as Freedom has been indexed, calculated and the results published for most countries in the world, so corruption scores are calculated for developed and developing economies. Corruption scores are good indicators for the quality of leadership and governance in the same way as economic variables like GDP and GDP growth are indicators of the growth path of the economy. Available data illustrates not only why many “bad” leaders are the product of corrupt practices in their countries, but also why once practiced it is difficult to get rid of, it persists (see N. Bissessar, (2009), “Does Corruption Persist in Sub-Saharan Africa?”, In International Advances in Economic Research, Special Issue: Developing the African Continent, pp. 336-350, Attiat F. Ott, guest editor).
Using corruption scores obtained from TI over the period 1989-2006 countries are ranked as highly corrupt (scores 0.00 – 3.59); middle corrupt (scores 3.60 – 4.19) and least corrupt (scores 4.20 – 6.00). The results obtained for 27 Sub-Saharan countries show that most of these African countries 63 percent – 100 percent (pp.336 – 350) fell in the most corrupt category while the percentage of countries in the low risk category was less than 7 percent. Of note is the fact that corruption which began to subside between 1984-1995 has taken a turn for the worst. The percentage of countries in the most corrupt category rose steeply and the percentage of countries in the middle corruption category fell dramatically (p. 339).
But corruption data, although stands on its own conveys little about societal structures—political, cultural, economics—that give rise to corruption and worse of all perpetuate its hold on society. Rather than “wring one’s hand in despair by pointing out that corruption is the “norm” rather than the “exception”, one needs to look closely at society’s make up and see how these “structures” made corruption not only tolerable but also persistent as well. Few data will help this search. Societal attributes such as ethnic, language, religion, literacy rate as well as the type of government (democratic, semi-democratic or authoritarian) in place help us understand why many leaders in Sub-Saharan Africa as well as elsewhere are corrupt and most of all why corruption is tolerated. In a paper “Is Economic Integration the Solution to African Development?” presented by Ott at a conference held on August 19-21 in Botswana (2008) sponsored by the Institute for Economic Policy Studies, these attribute along with corruption scores were compiled for 44 Sub-Saharan African countries over the period 1986-2005. From the data provided in Table 1 in the paper, it is clear that Sub-Saharan countries are quite diverse in terms of population profile—they are quite diverse in terms of ethnicity, language and religion. With respect to political structure there too, the democracy rating show the majority to be partly free or not free but the most disturbing finding perhaps is the level of education attained. The data shows a wide dispersion in the literacy rate, from a low of 22 percent for Burkina Faso (with high corruption score; partly free) to 84.4 percent for Mauritius (low corruption; free) and Namibia with a literacy rate of 85 percent (low corruption and free) (for more details see, www.iespolicy.org/files/Is%20Economic%20Integration_Ott.pdf) In short, by understanding the societal structure one may be able to pinpoint the factors that need to be addressed to promote good citizenship. After all, in post colonialism the leader is not the “stranger”, he/she is one of the people. What Africa deserves is good citizens with power to change the status quo. A good place to start is with education.
[1] Joachin Chisano received the Mo Ibrahim Prize for demonstrating good leadership.
Tuesday, May 4, 2010
Thursday, April 29, 2010
How Much Public Debt?: The Sky is the Limit and Why Not?
How much public debt a nation can withstand? In my previous blog (April 21, 2010), I discussed the fiscal deficit and its projected path over the next 10 years. The concern there had to do not solely with its size in relation to GDP but also in relation to the “expected growth” in federal spending with the full implementation of the Health Care Reform Act of 2010.
Economists are in the habit of making “prescriptions” for the economy by setting dosage levels that when exceeded, the patient’s health (in this case the economy) will falter if not die (become bankrupt). Those targets are neither pulled out of thin air nor set in stone. Moreover, one “target” does not fit all. Two such doses or “targets” are prescribed for world economies: one target for the deficit; the other for public debt.
Setting target levels does not mean strict adherence to these levels, except in such cases where it is mandated by some super national authority. For example, the admission to the European Union (EU) requires adherence to the union rules, two of which are the ratio of deficit to GDP and the second is a debt to GDP ratio (The Maastricht criteria are: The budget deficit must not exceed 3 percent of GDP and public debt not to exceed 60 percent or declining towards 60 percent. As I will discuss later on the first one is much more critical for admission than the second. Other countries (i.e. the US) may aim for the deficit or debt target but there is no mandate that requires the federal government to adhere to the target levels. Many state governments in the US however, cannot run deficits as their constitutions mandate a balanced budget. Before addressing the “economies” of deficit or debt targets, a bit of US history of deficits and debt along with some theorizing may be useful.
The Record:
In the US, talking about the fiscal deficit or the public debt makes news, good and bad. But the deficit and the debt numbers by themselves tell us nothing about budget issues or the fundamentals that shape their levels as well as their trends. Let me explain.
The fiscal deficit is a “byproduct” of fiscal actions reflecting both the “ideology” of successive administration as well as the historical path of the federal budget. As discussed in the earlier blog, the discretionary deficit reflects the decision of the “current administration” about its fiscal program—level of spending on federal programs and level of taxes on the national income.
To talk about the deficit and debt one needs to start with the federal budget. In democratic societies, the government is a political institution to which the public has assigned the task and the power of defining and protecting their property rights and, when necessary for the enhancement of the general welfare (i.e. the health care reform), the redistribution of these property rights. Since the government possesses no resources of its own, it must acquire them from private owners through taxes and by borrowing (debt). But how far can the government tax and borrow from the public? Put in another way what size should the federal budget be?
Back at the time of Adam Smith, the role of government was well defined and quite limited in scope; people then did not worry much about the size of the government. Two hundreds or so years later, the size of the budget, the budget programs, taxes, deficits and debts are issues that concern all societies and people of various persuasion.
Setting target levels does not mean strict adherence to these levels, except in such cases where it is mandated by some super national authority. For example, the admission to the European Union (EU) requires adherence to the union rules, two of which are the ratio of deficit to GDP and the second is a debt to GDP ratio (The Maastricht criteria are: The budget deficit must not exceed 3 percent of GDP and public debt not to exceed 60 percent or declining towards 60 percent. As I will discuss later on the first one is much more critical for admission than the second. Other countries (i.e. the US) may aim for the deficit or debt target but there is no mandate that requires the federal government to adhere to the target levels. Many state governments in the US however, cannot run deficits as their constitutions mandate a balanced budget. Before addressing the “economies” of deficit or debt targets, a bit of US history of deficits and debt along with some theorizing may be useful.
The Record:
In the US, talking about the fiscal deficit or the public debt makes news, good and bad. But the deficit and the debt numbers by themselves tell us nothing about budget issues or the fundamentals that shape their levels as well as their trends. Let me explain.
The fiscal deficit is a “byproduct” of fiscal actions reflecting both the “ideology” of successive administration as well as the historical path of the federal budget. As discussed in the earlier blog, the discretionary deficit reflects the decision of the “current administration” about its fiscal program—level of spending on federal programs and level of taxes on the national income.
To talk about the deficit and debt one needs to start with the federal budget. In democratic societies, the government is a political institution to which the public has assigned the task and the power of defining and protecting their property rights and, when necessary for the enhancement of the general welfare (i.e. the health care reform), the redistribution of these property rights. Since the government possesses no resources of its own, it must acquire them from private owners through taxes and by borrowing (debt). But how far can the government tax and borrow from the public? Put in another way what size should the federal budget be?
Back at the time of Adam Smith, the role of government was well defined and quite limited in scope; people then did not worry much about the size of the government. Two hundreds or so years later, the size of the budget, the budget programs, taxes, deficits and debts are issues that concern all societies and people of various persuasion.
One needs not go back to the days of Adam Smith to show the dramatic path the federal budget followed. It suffices to point out that its growth has been quite impressive—in 1794, for example, the federal government spent about $7 million; in 2009 federal spending reached $3,518 billion. Relative to GDP ($310 million in 1794), the ratio of spending to GDP was 2 percent; the corresponding figure for 2009 is 24.7 percent. Well! Going that far back is not very meaningful—nothing stays the same and no one (except maybe the Tea Party) would want to return to those days.[1]
So let us look at the numbers by five years interval over the past 59 years 1950-2009. From the data (Table 1) we discern the following: A critical imbalance between spending and receipts beginning in 1975 (except for a short span of time during the Clinton period), with receipts falling below their levels of the 1960’s. Note that in the 1960’s we had almost a balance budget followed by small deficits, except during the Reagan years (1981-89) where tax cuts coupled with an increase in defense spending produced an unprecedented level of deficits to GDP (5.1 percent) in the year 1985. After 1985, the deficit number was in the “tolerant” threshold of 3 percent. Today (2009) the deficit is blown off the chart at the unprecedented level of 9.9 percent of GDP.
So let us look at the numbers by five years interval over the past 59 years 1950-2009. From the data (Table 1) we discern the following: A critical imbalance between spending and receipts beginning in 1975 (except for a short span of time during the Clinton period), with receipts falling below their levels of the 1960’s. Note that in the 1960’s we had almost a balance budget followed by small deficits, except during the Reagan years (1981-89) where tax cuts coupled with an increase in defense spending produced an unprecedented level of deficits to GDP (5.1 percent) in the year 1985. After 1985, the deficit number was in the “tolerant” threshold of 3 percent. Today (2009) the deficit is blown off the chart at the unprecedented level of 9.9 percent of GDP.
But look closely at what is deriving this “out of experience” record. Budget receipts to GDP ratio between 2000 and 2009 are below their levels 50 years ago, (14.7 percent in 2009 compared to 17.8 percent in 1960) and a spending /GDP ratio in 2009 of 24.6 percent, only 2 percentage points above their level of 22.8 percent recorded during the Reagan years. The culprit then is not that spending is out of control, although this may be true, but that the government budget receipts have not kept up with the growth of spending. Both sides of the coin paint the deficit picture. To attack the deficit, one needs to change the fundamental thinking about its source. It is not uncommon to hear critics of the budget posture pointing to the growth of spending but few dare to point out the erosion in budget revenues. The conventional wisdom (proven again and again) is that it is easy to point out to a “runaway spending” than to point out the shortfall in budget receipts. Most of us feel the pinch of taxes, and only a few recognize the value of public spending. But to be serious about closing the budget gap, both sides of the equation have to adjust for it to come to a state of balance. This is easier said than done.
What about the debt? As shown in the table, the debt/GDP ratio over the period 1960-1990 oscillated between 30 percent and 55 percent, a level that did not depart much of what conventional (economics) wisdom suggests, around 60 percent. Once again we have an “out of experience” level of debt, a level equals to 83.3 percent in 2009. The values of these two indicators (deficit and debt) for 2009, where the trend continues bode ill for the growth of the American economy.
Why deficit and debt matter?
Recall that the debt evolves through deficits. Borrowing domestically (debt in the hands of the public) or from foreign countries (external debt) is not without cost. Borrowing entails interest payments on the debt which must be financed through budget receipts. An ever rising debt service requirements impairs the government’s ability to meet its budget spending and/or absorbs private income through taxation which would adversely affect private consumption and investment. A preponderance of evidence also shows that budget deficits raise interest rates and causes the inflation rate to rise by fueling inflation expectations. In short, a rising deficit and debt have repercussions over the short and the long run.
The ratios of 3 percent for the budget deficit to GDP and 60 percent of the public debt to GDP have been advocated for advanced economies and, in some instances, have been adhered to. When these indicators are discarded financial crisis occur and defaults are not far behind (experience of New York City in the 1970’s but one example).[2] A great deal can be said about the links between domestic debt and external debt. A most insightful account of debt crises domestic and external is given in a recent volume (2009), This Time is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth S. Rogoff (Princeton University Press). Not only does the volume provide a historical account of crises arising from both domestic debt and external debt but also provide the theoretical underpinning of debt crisis.[3] Policy makers may do well to take their diagnoses to heart so that they may hit on the right prescription.
What about the debt? As shown in the table, the debt/GDP ratio over the period 1960-1990 oscillated between 30 percent and 55 percent, a level that did not depart much of what conventional (economics) wisdom suggests, around 60 percent. Once again we have an “out of experience” level of debt, a level equals to 83.3 percent in 2009. The values of these two indicators (deficit and debt) for 2009, where the trend continues bode ill for the growth of the American economy.
Why deficit and debt matter?
Recall that the debt evolves through deficits. Borrowing domestically (debt in the hands of the public) or from foreign countries (external debt) is not without cost. Borrowing entails interest payments on the debt which must be financed through budget receipts. An ever rising debt service requirements impairs the government’s ability to meet its budget spending and/or absorbs private income through taxation which would adversely affect private consumption and investment. A preponderance of evidence also shows that budget deficits raise interest rates and causes the inflation rate to rise by fueling inflation expectations. In short, a rising deficit and debt have repercussions over the short and the long run.
The ratios of 3 percent for the budget deficit to GDP and 60 percent of the public debt to GDP have been advocated for advanced economies and, in some instances, have been adhered to. When these indicators are discarded financial crisis occur and defaults are not far behind (experience of New York City in the 1970’s but one example).[2] A great deal can be said about the links between domestic debt and external debt. A most insightful account of debt crises domestic and external is given in a recent volume (2009), This Time is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth S. Rogoff (Princeton University Press). Not only does the volume provide a historical account of crises arising from both domestic debt and external debt but also provide the theoretical underpinning of debt crisis.[3] Policy makers may do well to take their diagnoses to heart so that they may hit on the right prescription.
[1] For historical statistics see: http://usgornementspending,com/federal_debt_chart.html, Budget data and GDP data are also reported in the National Income and Product Accounts
[2]See Attiat F. Ott (1975), “The New York Financial Crisis: Can the Trend be Reversed? American Enterprise Institute (November), Washington, D.C.
[3] Concern today is voiced for the debt problem facing Greece, Spain and Portugal. The debt crisis may spillover affecting both the US and emerging economies.
[3] Concern today is voiced for the debt problem facing Greece, Spain and Portugal. The debt crisis may spillover affecting both the US and emerging economies.
Wednesday, April 21, 2010
The Fiscal Deficit…Is As Far As The Eye Can See
For quite some time I thought about venting my frustration about what is written about the soaring fiscal deficit. Not that it is beyond the “norm”, if there is such a thing of what a “responsible” fiscal stand dictates but because of the latest claim as to why the budget deficit and hence the federal debt is soaring, uncontrollable, unsustainable or downright un-American.
What prompted me to get on with it and write this blog is an article about the deficit which appeared in the New England Journal of Medicine (April 1, 2010): “The Specter of Financial Armageddon-Health Care and Federal Debt in the United States” by Michael E. Chernew, Ph. D., Katherine Baicker, Ph.D. and John Hsu, M.D., M.B.A, M.S.C.E. All of the authors, one way or another, are involved in health care policy and/or health economics (see NJM p.1168 for affiliation). The authors’ main thesis is that the health care reform goals (which became law on March 21, 2010), although “laudable”, will have dire consequences in that spending on health care will “add substantially to our structural spending and thus necessitate more draconian fiscal austerity elsewhere” (NJM p. 1168).
Before going further, let me first congratulate the authors for explaining to the journal’s audience (after all not all readers of the NJM are likely to be versed in the field of public economics), that the term deficit and hence the size of the deficit is linked to the state of the economy. In other words, “not all deficits are equals”. The total deficit consists of two parts: autonomous and induced. Autonomous means discretionary while induced is not. When the government makes a decision to purchase an item (expenditure), just like you and I, it needs revenue to meet the purchase. If there is no revenue, it borrows the money and hence the deficit. This deficit was labeled “structural deficit”. The other component, the “induced” reflects what is happening in the economy. Just like the individual seller, when the economy falters and people lose their jobs, their purchases of certain goods are curtailed or eliminated, and hence the seller’s income falls not because of his own actions (i.e. he decided not to sell), but because the economic condition has worsened. The same with government revenues: when economic conditions falter, the Treasury tax collection falls, government spending on income support such as unemployment compensation rises and the deficit materializes. After the economy rebounds, the opposite takes place. In short, this part of the deficit is “induced” and not at the discretion of the government. Since the rise and fall in economic activity is labeled “the business cycle”, this deficit component was called the “cyclical” deficit.
There is not much policy makers can do about the cyclical deficit (at least in the short run) and should not be of concern. Obviously, if the business cycle can be “eliminated” this component will disappear and all we have is the discretionary deficit. I prefer the discretionary term rather than the structural term as it conveys the willful act of the public sector.
Having decomposed the deficit into its two components, any discussion about its rise or fall has to be clear about which deficit we are talking about and here lie the thesis of the NJM’s article. Since Health Care Reform entails discretionary federal spending, unless it is financed dollar for dollar by new federal receipts, or through reallocation of federal spending (cuts in other federal programs), no matter how you slice it the discretionary deficit will increase. This is true now as it has always been.
The history of federal deficits, which I will explore in a later piece, will convey this simple story. The budget process (where the determination of expenditures, revenues and the discretionary deficit take place) is invariant to the expenditure program initiated (whether that may be health care, defense spending, social security and so on), or taxes raised or lowered.
To form an opinion about the predicted dire consequences of the Health Care Reform on the deficit and whether “draconian” fiscal measures may have to be used to address them, a look at the actual and projected federal deficits may be enlightening if not useful. With respect to the public debt, its path follows the path of deficits since budget short falls have to be funded by issuing new debt which adds to the stock of the public debt in the hands of the public. A government that balances its budget will have no need to add to the stock of debt. The debt (a stock accumulation of flows of deficits) as a ratio of GDP (a flow) is a useful indicator of the capacity of the economy to sustain indebtedness.
Why accumulate deficits and debt?
There is an economic theory of deficits backed up by research suggesting that politicians behave strategically (Persson and Svensson (1989) and Alesina and Tabellini (1990)). The essence of this proposition is that the deficit and debt issues are used strategically by the current government to influence the fiscal decisions of those who will succeed them. In other words a Republican government may accumulate debt during its tenure to force its successor (presumably a democratic government) to curtail federal spending or raise federal taxes.
Getting back to Chernew et al’s article in the NJM (April 1, 2010), there is a need to examine the link between federal health care spending and the budget deficit, a link which is of great concern to the authors.
The authors provide data (obtained from a letter written by the director of the Congressional Budget Office to Senator Inouye, March 5, 2010) which purports to show that federal health care spending which amounted to 5 percent of the GDP and 20 percent of the federal outlays in 2009 is forecast to reach 12 percent of the GDP by 2050—a 41 year stretch.
The authors do not elaborate on whether or not this growth reflects the full implementation of the Health Care Reform Act neither do they inform the reader about the underlying reasons for the growth in health care spending, one of which is the aging of the population. A better indicator would be the growth of federal spending on health care per capita as compared to the growth rate of per capita GDP.
Even assuming that the only concern is with the growth rate, then one can translate the figure (7 percent increase from 5 percent to 12 percent) into an an
nual growth rate over the 41 year period. This growth rate is equal to 2 percent per year, not much if GDP is to grow at an annual growth rate of 3 percent which (hopefully) is achievable over the business cycle.
Calculation of growth rates aside, the concern should be over the “planning cycle” of the federal budget which is 10 years. The Congressional Budget Office (CBO, January 2010) provides projections of budget outlays, revenues and deficits over the period 2010-2020. It is perhaps useful to divide the period into two sub-periods 2010-2014 and 2015-2020. In the first sub-period, some but not all of the provisions of the Health Care Reform Act will be implemented. The second sub-period, 2015-2020, is the period where the full provisions of the reform would have been implemented. So let us look at the numbers (These are CBO’s projections based on the President’s Budget of 2009). The year 2009 is taken as the reference point.
What these numbers tell us and why the budget path matters.
Let us first look at the first period 2010-2014. Two numbers—deficits and debt—are of significance no matter what one’s political persuasion—fiscal conservative or fiscal liberal. CBO has been labeled as “bipartisan”. By that it meant that those who “crunch up” the numbers are professional (mostly economists) who do not inject their political views into the projection. That does not necessarily means that the actual numbers will exactly match projected numbers but this is the “best” given the uncertainty of the path of the economy. With this caveat one ought to take the projection in “the spirit” they are given. Now, what we have in the first period (2010-2014) is a steady decline in the deficit path from 10.3 percent of the GDP in 2010 to 4.1 percent of the GDP in 2014. This is a remarkable achievement indeed. Now comes the “horrifying” story of deficits for the period 2015-2020 and hence the overly pessimistic forecasts of what await us (expressed in Chernew’s article as well as by others) if these projected deficits turned out to be actual deficits.
The projected outlook shows a rise in the ratio of deficit to GDP from 4.1 percent in 2014 to 5.6 percent in 2020, an increase of 1.5 percent of GDP over a 5 year period. But then recall that in 2009 the actual deficit GDP ratio was 9.9 percent and the projection for 2010 is 10.3 percent. Remember what is being said earlier—the total deficit reflects both induced (discretionary budget action) and autonomous (reflecting the state of the economy) deficits. Given that we are in a “recession”, the economy’s lower path impacts the total deficit because of the fall in the level of economic activity and the rise in spending on transfer payments (for example unemployment insurance and stimulus packages).
The projection beyond 2010 clearly assumes a rebound in the level of economic activity and hence one would expect lower deficits to GDP ratios beyond 2010. Why then the deficit/GDP ratios are projected to rise in the 2015-2020 period?
The story lies in the projected path of spending and revenues. In the first period, revenues are projected to grow by 9 percent annual growth rate while spending growth is projected to grow at an annual rate of 2 percent. In the second period, revenues is projected to grow at 4 percent annual rate while spending growth is projected at 3.9 percent annual growth rate. The projection hence assumes an “increase” in the annual growth rate of spending in the second period by 2.7 percent (from 2 percent annual growth rate in the first period) while revenue growth falls from an annual rate of 9 percent in the first period to 3.9 percent annual growth rate. The increase in the annual growth rate of spending beyond 2014 is understandable as the growth must reflect the spending impact of the Health Care Reform Act. As to revenue projections many underlying assumptions may have to account for this such as the assumption about the state of the economy, a discretionary tax cut, or both perhaps enacted in the period. These assumptions should give the reader “food for thought”.
If our economic theory of deficits is correct, then the current administration in increasing, over its tenure, the growth path of the deficit will “tie” the hands of the next administration, especially if the new administration was “fiscally conservative”. By tying its hands it is meant that neither new spending initiatives can be undertaken nor “tax cuts” would be effected.
What about the public (or national) debt?
The projected debt numbers from 2015-2020 are “staggering” but what those numbers mean? And should they give up a pose? Because of the complexity of this issue, I will defer the answers to a follow up blog.
Where do the Health Care spending figures in all of this?
There are many sources which give projected levels of Health Care spending. According to the National Health Expenditure Projections, total National Health Care spending was to exceed $2.5 trillion in 2009 which put it at 17.6 percent of the GDP (see also Economic Report of the President, February 2010). CBO projections put the trend upward so that by 2020 National Health Care expenditures would be around 20 percent of GDP. The corresponding GDP figures for these two years are $14.3 trillion in 2009 and $22.4 trillion in 2020, an annual growth rate of GDP of 4.2 percent. Translating the growth rate of National Health Care spending into “levels” we get spending level for the year 2020 of $4.48 trillion—an annual growth rate of health care spending between 2009 and 2020 of 5.4 percent which (if the projection holds) mean a 1.2 percent difference in the projected annual growth rates of health care spending and GDP. This clearly suggests a shift in the spending growth in favor of health at the expense of other type of spending.
What about public sector (government) spending on health care (the culprit in all the debates on health care)? It is interesting if not “funny” that National Health Expenditure Projections (released by the Center for Medicare or Medicaid services) project health care spending to “decelerate” to 3.9 percent in 2010. CMS attributes this slowdown to a “deceleration in Medicare spending growth (1.5 percent in 2010 compared to 8.1 percent in 2009).” If this trend continues, then it would provide a cushion against the anticipated rise in health care spending under the Health Care Reform Act.
Obviously more can be said about these projections. This task has to wait until projected numbers are on a more solid footing as projected growth rates of health care spending impact the federal deficits and these in turn impact the projected path of the federal debt. These issues will be dealt with in my next blog. For now, a quotation from “Government by Red Ink” by Nobel Laureate James M. Buchanan, Professor Charles K. Rowley and Robert Tollison gives us food for thought:
“Many and varied are the perspectives on budget deficits offered by those who analyze them from a reformist standpoint. Some look for a return to the Victorian Prudent house hold ethic…others look for the election to office of the more responsible, less myopic politicians”
(In Deficits, 1986, p,3).
What prompted me to get on with it and write this blog is an article about the deficit which appeared in the New England Journal of Medicine (April 1, 2010): “The Specter of Financial Armageddon-Health Care and Federal Debt in the United States” by Michael E. Chernew, Ph. D., Katherine Baicker, Ph.D. and John Hsu, M.D., M.B.A, M.S.C.E. All of the authors, one way or another, are involved in health care policy and/or health economics (see NJM p.1168 for affiliation). The authors’ main thesis is that the health care reform goals (which became law on March 21, 2010), although “laudable”, will have dire consequences in that spending on health care will “add substantially to our structural spending and thus necessitate more draconian fiscal austerity elsewhere” (NJM p. 1168).
Before going further, let me first congratulate the authors for explaining to the journal’s audience (after all not all readers of the NJM are likely to be versed in the field of public economics), that the term deficit and hence the size of the deficit is linked to the state of the economy. In other words, “not all deficits are equals”. The total deficit consists of two parts: autonomous and induced. Autonomous means discretionary while induced is not. When the government makes a decision to purchase an item (expenditure), just like you and I, it needs revenue to meet the purchase. If there is no revenue, it borrows the money and hence the deficit. This deficit was labeled “structural deficit”. The other component, the “induced” reflects what is happening in the economy. Just like the individual seller, when the economy falters and people lose their jobs, their purchases of certain goods are curtailed or eliminated, and hence the seller’s income falls not because of his own actions (i.e. he decided not to sell), but because the economic condition has worsened. The same with government revenues: when economic conditions falter, the Treasury tax collection falls, government spending on income support such as unemployment compensation rises and the deficit materializes. After the economy rebounds, the opposite takes place. In short, this part of the deficit is “induced” and not at the discretion of the government. Since the rise and fall in economic activity is labeled “the business cycle”, this deficit component was called the “cyclical” deficit.
There is not much policy makers can do about the cyclical deficit (at least in the short run) and should not be of concern. Obviously, if the business cycle can be “eliminated” this component will disappear and all we have is the discretionary deficit. I prefer the discretionary term rather than the structural term as it conveys the willful act of the public sector.
Having decomposed the deficit into its two components, any discussion about its rise or fall has to be clear about which deficit we are talking about and here lie the thesis of the NJM’s article. Since Health Care Reform entails discretionary federal spending, unless it is financed dollar for dollar by new federal receipts, or through reallocation of federal spending (cuts in other federal programs), no matter how you slice it the discretionary deficit will increase. This is true now as it has always been.
The history of federal deficits, which I will explore in a later piece, will convey this simple story. The budget process (where the determination of expenditures, revenues and the discretionary deficit take place) is invariant to the expenditure program initiated (whether that may be health care, defense spending, social security and so on), or taxes raised or lowered.
To form an opinion about the predicted dire consequences of the Health Care Reform on the deficit and whether “draconian” fiscal measures may have to be used to address them, a look at the actual and projected federal deficits may be enlightening if not useful. With respect to the public debt, its path follows the path of deficits since budget short falls have to be funded by issuing new debt which adds to the stock of the public debt in the hands of the public. A government that balances its budget will have no need to add to the stock of debt. The debt (a stock accumulation of flows of deficits) as a ratio of GDP (a flow) is a useful indicator of the capacity of the economy to sustain indebtedness.
Why accumulate deficits and debt?
There is an economic theory of deficits backed up by research suggesting that politicians behave strategically (Persson and Svensson (1989) and Alesina and Tabellini (1990)). The essence of this proposition is that the deficit and debt issues are used strategically by the current government to influence the fiscal decisions of those who will succeed them. In other words a Republican government may accumulate debt during its tenure to force its successor (presumably a democratic government) to curtail federal spending or raise federal taxes.
Getting back to Chernew et al’s article in the NJM (April 1, 2010), there is a need to examine the link between federal health care spending and the budget deficit, a link which is of great concern to the authors.
The authors provide data (obtained from a letter written by the director of the Congressional Budget Office to Senator Inouye, March 5, 2010) which purports to show that federal health care spending which amounted to 5 percent of the GDP and 20 percent of the federal outlays in 2009 is forecast to reach 12 percent of the GDP by 2050—a 41 year stretch.
The authors do not elaborate on whether or not this growth reflects the full implementation of the Health Care Reform Act neither do they inform the reader about the underlying reasons for the growth in health care spending, one of which is the aging of the population. A better indicator would be the growth of federal spending on health care per capita as compared to the growth rate of per capita GDP.
Even assuming that the only concern is with the growth rate, then one can translate the figure (7 percent increase from 5 percent to 12 percent) into an an
nual growth rate over the 41 year period. This growth rate is equal to 2 percent per year, not much if GDP is to grow at an annual growth rate of 3 percent which (hopefully) is achievable over the business cycle.Calculation of growth rates aside, the concern should be over the “planning cycle” of the federal budget which is 10 years. The Congressional Budget Office (CBO, January 2010) provides projections of budget outlays, revenues and deficits over the period 2010-2020. It is perhaps useful to divide the period into two sub-periods 2010-2014 and 2015-2020. In the first sub-period, some but not all of the provisions of the Health Care Reform Act will be implemented. The second sub-period, 2015-2020, is the period where the full provisions of the reform would have been implemented. So let us look at the numbers (These are CBO’s projections based on the President’s Budget of 2009). The year 2009 is taken as the reference point.
What these numbers tell us and why the budget path matters.
Let us first look at the first period 2010-2014. Two numbers—deficits and debt—are of significance no matter what one’s political persuasion—fiscal conservative or fiscal liberal. CBO has been labeled as “bipartisan”. By that it meant that those who “crunch up” the numbers are professional (mostly economists) who do not inject their political views into the projection. That does not necessarily means that the actual numbers will exactly match projected numbers but this is the “best” given the uncertainty of the path of the economy. With this caveat one ought to take the projection in “the spirit” they are given. Now, what we have in the first period (2010-2014) is a steady decline in the deficit path from 10.3 percent of the GDP in 2010 to 4.1 percent of the GDP in 2014. This is a remarkable achievement indeed. Now comes the “horrifying” story of deficits for the period 2015-2020 and hence the overly pessimistic forecasts of what await us (expressed in Chernew’s article as well as by others) if these projected deficits turned out to be actual deficits.
The projected outlook shows a rise in the ratio of deficit to GDP from 4.1 percent in 2014 to 5.6 percent in 2020, an increase of 1.5 percent of GDP over a 5 year period. But then recall that in 2009 the actual deficit GDP ratio was 9.9 percent and the projection for 2010 is 10.3 percent. Remember what is being said earlier—the total deficit reflects both induced (discretionary budget action) and autonomous (reflecting the state of the economy) deficits. Given that we are in a “recession”, the economy’s lower path impacts the total deficit because of the fall in the level of economic activity and the rise in spending on transfer payments (for example unemployment insurance and stimulus packages).
The projection beyond 2010 clearly assumes a rebound in the level of economic activity and hence one would expect lower deficits to GDP ratios beyond 2010. Why then the deficit/GDP ratios are projected to rise in the 2015-2020 period?
The story lies in the projected path of spending and revenues. In the first period, revenues are projected to grow by 9 percent annual growth rate while spending growth is projected to grow at an annual rate of 2 percent. In the second period, revenues is projected to grow at 4 percent annual rate while spending growth is projected at 3.9 percent annual growth rate. The projection hence assumes an “increase” in the annual growth rate of spending in the second period by 2.7 percent (from 2 percent annual growth rate in the first period) while revenue growth falls from an annual rate of 9 percent in the first period to 3.9 percent annual growth rate. The increase in the annual growth rate of spending beyond 2014 is understandable as the growth must reflect the spending impact of the Health Care Reform Act. As to revenue projections many underlying assumptions may have to account for this such as the assumption about the state of the economy, a discretionary tax cut, or both perhaps enacted in the period. These assumptions should give the reader “food for thought”.
If our economic theory of deficits is correct, then the current administration in increasing, over its tenure, the growth path of the deficit will “tie” the hands of the next administration, especially if the new administration was “fiscally conservative”. By tying its hands it is meant that neither new spending initiatives can be undertaken nor “tax cuts” would be effected.
What about the public (or national) debt?
The projected debt numbers from 2015-2020 are “staggering” but what those numbers mean? And should they give up a pose? Because of the complexity of this issue, I will defer the answers to a follow up blog.
Where do the Health Care spending figures in all of this?
There are many sources which give projected levels of Health Care spending. According to the National Health Expenditure Projections, total National Health Care spending was to exceed $2.5 trillion in 2009 which put it at 17.6 percent of the GDP (see also Economic Report of the President, February 2010). CBO projections put the trend upward so that by 2020 National Health Care expenditures would be around 20 percent of GDP. The corresponding GDP figures for these two years are $14.3 trillion in 2009 and $22.4 trillion in 2020, an annual growth rate of GDP of 4.2 percent. Translating the growth rate of National Health Care spending into “levels” we get spending level for the year 2020 of $4.48 trillion—an annual growth rate of health care spending between 2009 and 2020 of 5.4 percent which (if the projection holds) mean a 1.2 percent difference in the projected annual growth rates of health care spending and GDP. This clearly suggests a shift in the spending growth in favor of health at the expense of other type of spending.
What about public sector (government) spending on health care (the culprit in all the debates on health care)? It is interesting if not “funny” that National Health Expenditure Projections (released by the Center for Medicare or Medicaid services) project health care spending to “decelerate” to 3.9 percent in 2010. CMS attributes this slowdown to a “deceleration in Medicare spending growth (1.5 percent in 2010 compared to 8.1 percent in 2009).” If this trend continues, then it would provide a cushion against the anticipated rise in health care spending under the Health Care Reform Act.
Obviously more can be said about these projections. This task has to wait until projected numbers are on a more solid footing as projected growth rates of health care spending impact the federal deficits and these in turn impact the projected path of the federal debt. These issues will be dealt with in my next blog. For now, a quotation from “Government by Red Ink” by Nobel Laureate James M. Buchanan, Professor Charles K. Rowley and Robert Tollison gives us food for thought:
“Many and varied are the perspectives on budget deficits offered by those who analyze them from a reformist standpoint. Some look for a return to the Victorian Prudent house hold ethic…others look for the election to office of the more responsible, less myopic politicians”
(In Deficits, 1986, p,3).
Thursday, March 25, 2010
Good News For Africa: The Poverty Rate has Fallen
Good News For Africa: The Poverty Rate has Fallen
“African poverty is falling”, so says Xavier Sala-i-Martin and Maxim Pinkovskiy in a recent NBER paper (National Bureau of Economic Research, working paper 15775, February 2010).
The study of poverty in general and African poverty in particular goes in cycle. During the Johnson and Nixon administrations the economics profession devoted a great deal of efforts to measure US poverty rates and to come up with solutions to poverty. These solutions ranged from a negative income tax (Milton Friedman) to the family assistance plans.
Measurements of poverty however, have remained an engaging subject for many in the economic profession and especially for those at the University of Wisconsin--Madison Institute for Research on Poverty, the Urban Institute and, the Brooking Institution.
The economics profession’s interest in the study of poverty although was dominated by the study of US poverty, development economists notably Amartya Sen have exerted great efforts in measuring poverty in developing counties, identifying its causes as well as advancing solutions to address it. Such efforts notwithstanding, eradicating or substantially reducing poverty here and elsewhere has remained beyond the grasp of politicians and their economic advisors.
In the past couple of years, measurement of poverty has taken central stage. For the most part, the focus was on US poverty (see AEI, “The Poverty of the Official Poverty” by Nicholas Eberstadt, November 2008, and Brookings, “Improving the Measurement of Poverty”, December 2008). Poverty rates and “poverty line” in the developing world and especially in Sub-Saharan Africa did not escape the attention of economists motivated in part by the goal set in the 2008 Millennium Development Goals Report (MDG) (UN, 2008). The report has set a target for reducing developing countries’ poverty rates by the year 2015. The MDG report was not very optimistic about reducing Sub-Saharan Africa poverty rate by that date citing many factors that hinder growth.
In his presidential address to the American Economic Association (January 17th, 2010), Professor Angus Deaton of Princeton University provided an exhaustive analysis of world poverty and inequality. Most of the discussion however was devoted to the role played by the purchasing power parity (PPP) price indexes in the measurement of global poverty and global inequality.1 The Deaton address (paper) is 60 pages in length and for the non professional economist it is a bit “boring” and cumbersome. The critique aside, the general tenet of the paper and hence comparisons of poverty rates hinges on the revision of the PPP indexes reported in the International Comparison Project (ICP). If one were to believe in the soundness of the ICP revision of the purchasing power parity.
Thus according to the ICP, “Global inequality has increased and this reduced the global poverty line relative to the US dollar”.
Before getting into the “nitty-gritty” of measurement, few numbers may be helpful. Deaton provides in Table 1 of the paper, poverty head count ratios and the global poverty line expressed in year X (say 2005) PPP international dollars. The information reported are note worthy in that it contrasts changes in poverty ratios since 1981 (¬¬¬¬Three data points are given 1981, 1993, 2005). Measurement of the percentage of people in poverty in each of these years has to be calculated on the basis of the poverty line derived from the PPP at a given date. Thus, using the year 2005, the poverty line is defined by a number, in this case $1.25. This means that if a person in country Y for example Ethiopia or Nepal received $1.25 a day in income (whatever the source), then he is not counted as poor. At $1.24 he is counted as a poor person. The poverty line hence is used to count the ratio of the population that is labeled as “poor”. Given the significance of the poverty line to the count of people who are in poverty, Deaton’s 60-page-paper engages the reader into an explanation of what this number means for the count of people in poverty and hence changes in global inequality over time.2
Not to get tangled in the “details”, the paper provides a “powerful” message. Global inequality has fallen over the past two and a half decades. The total percentage of people in poverty (using the $1.25 poverty line) has fallen from 51.9 percent in 1981 to 25.2 percent in 2005. This is good news to be sure. How do people in one country or a continent fare against people in another or others depend on where they live. For example, contrast the poverty profile of a person in East Asia Pacific with that of a person in Sub-Saharan Africa. In the year 1981, 77.7 percent of the people in East Asia Pacific were classified as poor at the $1.25 poverty line. This percentage has fallen to 16.8 percent, a decline of almost 80 percent.
Compare this rate of decline with that for Sub-Saran Africa. Again, at the $1.25 poverty line measure, the percent of population that would have been classified as poor in 1981 was 53.4 percent. By 2005 this percent has fallen to 50.9 percent, a decline of almost 5 percent—Great news for Sub-Saharan Africa.
Looking at the count rather than the percentage, the global poverty (measured at $1.25 poverty line), has fallen from a count of 1,900 millions in 1981 to 1,374 million in 2005, a fall of more than 27 percent in a two and one half decade. That is not bad or is it?
Deaton‘s paper goes beyond the statistics I have cited. It is worth the time and effort to expend to understand the magnitude of the problem. One issue that is worth investigating is the sample entities, the size of the population in each member of the sample and the economic progress attained there.
Back to Sub-Saharan Africa. As mentioned earlier, Deaton tells us that the poverty rate there has fallen from 53.4 percent in 1981 to 50.9 percent in 2005. Xavier-sala-i-Martin and Maxim Pinskovskiy (NBER, 2010) are much more upbeat about the prospects of poverty reduction in Sub-Saharan Africa. The authors focus exclusively on African poverty using three poverty lines; daily income of $1, $2 and $3. Translated into yearly income in US dollars, they get a value of $365 in 1985 dollars for a poverty line of $1/day. The authors provide extensive data analysis of the African distributions of income for 4 data points: 1970, 1990, 2000 and 2006. Because of this selection and the choice of the poverty lines, values, their findings are not totally comparable to those of Deaton. Nonetheless, their results on changes in the African poverty rate between 1970 and 2006 at $1/day poverty line augment what one learns from Deaton’s.
Taking the range of $1/day and $2/day poverty lines one may be able to contrast their findings with those reported by Deaton. African poverty rate for 1981 at $1/day is given as 39.4 percent. At $2/day, the rate is 64.8 percent. The number reported by Deaton is somewhere in between, at 53.4 percent for $1.25/day. The difference is not unreasonable. In 1993, according to Sala-i-Martin and Pinkovskiy the poverty rate (surprisingly) rose to 42.2 percent at $1/day and to 67.1 percent at $2/day. For 2005, the respective rates are 33.1 percent and 60.9 percent. Over the 1981 to 2005 period, the decline in the poverty rate measured at $1/day is 15.9 percent but at $2/day it is only 6 percent, which is a bit closer to Deaton’s rate of decline of 5 percent estimated at $1.25/day.
How great is the decline? Measured at $2/say, it is 6 percent over two and half decades. Good news but nothing to write Home about.
Fortunately, the story does not end there. Sala-i-Martin and co-author Pinkovskiy predict that by 2015 the $1/day poverty rate will be 22.8 percent, a decline of 10.3 percent over 10 year period (from 33.1 percent in 2005), a one percent reduction per year. That is indeed remarkable if true. What makes it so is that it is within the range reported for the previous 14 years where the rate has fallen 1.4 percent per year from 1981 to 2005. With such progress the authors predict that the poverty rate of 21.0 percent by 2015 set by the 2008 Millennium Development Goals (UN, 2008), is attainable but perhaps in the year 2017 rather than 2015.
What accounts for the poverty rate decline? Whether one accepts the numbers given in Deaton or Sala-i-Martin and Pinkovskiy the answer is simple and expected: a “decent” growth rate of per capita Gross Domestic Product (GDPP). The correlation between the two holds for all countries, whether the country is developed or developing in Africa or in the EU and the US. The question that has and continued to be asked is what accounts for economic growth and whether observed growth in any country over any period is sustainable. This is a topic for another essay. For now it suffices to point out that the driving force in the evolution of poverty “is an almost exact mirror image of the evolution of GDP per capita” (Sala-i-Martin and Pinkovskiy, p.10). If growth is sustained then the authors’ prediction for 2017 will be achieved, if not the MDG target will neither be met in 2015 or 2017.
Authors’ prediction clearly hinges on the state of affairs in the world following the global financial crisis of 2008. But there is room for hope as the world economy seems to be moving, albeit slowly towards a decent recovery.
A final note which I shall revisit in the future. The notion that $1.25/day, $2/day or $3/day as a benchmark for counting people in poverty worldwide is a “bare” and “unfeeling” statistic. Think about what $1.25 buy an individual in Timbuktu, Ethiopia or Nepal. The bold hard fact does not convey what that individual be a male, female, adult, child or an elderly consumes in terms of goods and services. The number is said to be obtained from household surveys. Given that household survey data are available what would be most enlightening is to use it to show the composition and the size of the basket of goods which the $1.25 buy in each of these countries compared to the “standard” for a decent living. Undoubtedly, one can set the rate at $5, $6, $7 or what a decent living implies.
Deacon gives us a glimpse of what a decent living means derived from data on well being measures from the Gallop World Poll (Table 8, p. 55). Using the year 2006 as the base, 37.9 percent of the world population reported “poor living standards” with the percentage rising to 38.6 in 2009. For Sub-Saharan Africa population the corresponding number is 61.4 percent in 2006 rising to 62.6 percent in 2009. These numbers tell a different story, perhaps closer to what poverty means than the sheer count of the numbers in poverty.
One can easily define what a decent living standard requires (for example BEA basket of goods and services used to determine the cost of living index in the US). What is not easy is how to get there. If indeed the world organizations and we as individuals in affluent societies care about global poverty then efforts should be exerted to enable Sub-Saharan African countries (the region with the highest poverty rate) to make substantial advances in reducing poverty. We should not be satisfied with 5, 6, 10 or even 15 percent reduction in the poverty rate over a decade with a standard of living set at $1 or even $2 a day.
---------
1 PPP are needed to translate purchasing power in one country’s currency into US purchasing power. In other words, if a good costs 16 rupees in India, with PPP exchange rate, the cost is expressed in terms of dollars.
2 To get a feel of the numbers in a comparative setting, the poverty rate in the US in 1981 was 14.0 percent at $12.65/day. In 2005 the corresponding figures are 12.6 percent at $27.32/day.
“African poverty is falling”, so says Xavier Sala-i-Martin and Maxim Pinkovskiy in a recent NBER paper (National Bureau of Economic Research, working paper 15775, February 2010).
The study of poverty in general and African poverty in particular goes in cycle. During the Johnson and Nixon administrations the economics profession devoted a great deal of efforts to measure US poverty rates and to come up with solutions to poverty. These solutions ranged from a negative income tax (Milton Friedman) to the family assistance plans.
Measurements of poverty however, have remained an engaging subject for many in the economic profession and especially for those at the University of Wisconsin--Madison Institute for Research on Poverty, the Urban Institute and, the Brooking Institution.
The economics profession’s interest in the study of poverty although was dominated by the study of US poverty, development economists notably Amartya Sen have exerted great efforts in measuring poverty in developing counties, identifying its causes as well as advancing solutions to address it. Such efforts notwithstanding, eradicating or substantially reducing poverty here and elsewhere has remained beyond the grasp of politicians and their economic advisors.
In the past couple of years, measurement of poverty has taken central stage. For the most part, the focus was on US poverty (see AEI, “The Poverty of the Official Poverty” by Nicholas Eberstadt, November 2008, and Brookings, “Improving the Measurement of Poverty”, December 2008). Poverty rates and “poverty line” in the developing world and especially in Sub-Saharan Africa did not escape the attention of economists motivated in part by the goal set in the 2008 Millennium Development Goals Report (MDG) (UN, 2008). The report has set a target for reducing developing countries’ poverty rates by the year 2015. The MDG report was not very optimistic about reducing Sub-Saharan Africa poverty rate by that date citing many factors that hinder growth.
In his presidential address to the American Economic Association (January 17th, 2010), Professor Angus Deaton of Princeton University provided an exhaustive analysis of world poverty and inequality. Most of the discussion however was devoted to the role played by the purchasing power parity (PPP) price indexes in the measurement of global poverty and global inequality.1 The Deaton address (paper) is 60 pages in length and for the non professional economist it is a bit “boring” and cumbersome. The critique aside, the general tenet of the paper and hence comparisons of poverty rates hinges on the revision of the PPP indexes reported in the International Comparison Project (ICP). If one were to believe in the soundness of the ICP revision of the purchasing power parity.
Thus according to the ICP, “Global inequality has increased and this reduced the global poverty line relative to the US dollar”.
Before getting into the “nitty-gritty” of measurement, few numbers may be helpful. Deaton provides in Table 1 of the paper, poverty head count ratios and the global poverty line expressed in year X (say 2005) PPP international dollars. The information reported are note worthy in that it contrasts changes in poverty ratios since 1981 (¬¬¬¬Three data points are given 1981, 1993, 2005). Measurement of the percentage of people in poverty in each of these years has to be calculated on the basis of the poverty line derived from the PPP at a given date. Thus, using the year 2005, the poverty line is defined by a number, in this case $1.25. This means that if a person in country Y for example Ethiopia or Nepal received $1.25 a day in income (whatever the source), then he is not counted as poor. At $1.24 he is counted as a poor person. The poverty line hence is used to count the ratio of the population that is labeled as “poor”. Given the significance of the poverty line to the count of people who are in poverty, Deaton’s 60-page-paper engages the reader into an explanation of what this number means for the count of people in poverty and hence changes in global inequality over time.2
Not to get tangled in the “details”, the paper provides a “powerful” message. Global inequality has fallen over the past two and a half decades. The total percentage of people in poverty (using the $1.25 poverty line) has fallen from 51.9 percent in 1981 to 25.2 percent in 2005. This is good news to be sure. How do people in one country or a continent fare against people in another or others depend on where they live. For example, contrast the poverty profile of a person in East Asia Pacific with that of a person in Sub-Saharan Africa. In the year 1981, 77.7 percent of the people in East Asia Pacific were classified as poor at the $1.25 poverty line. This percentage has fallen to 16.8 percent, a decline of almost 80 percent.
Compare this rate of decline with that for Sub-Saran Africa. Again, at the $1.25 poverty line measure, the percent of population that would have been classified as poor in 1981 was 53.4 percent. By 2005 this percent has fallen to 50.9 percent, a decline of almost 5 percent—Great news for Sub-Saharan Africa.
Looking at the count rather than the percentage, the global poverty (measured at $1.25 poverty line), has fallen from a count of 1,900 millions in 1981 to 1,374 million in 2005, a fall of more than 27 percent in a two and one half decade. That is not bad or is it?
Deaton‘s paper goes beyond the statistics I have cited. It is worth the time and effort to expend to understand the magnitude of the problem. One issue that is worth investigating is the sample entities, the size of the population in each member of the sample and the economic progress attained there.
Back to Sub-Saharan Africa. As mentioned earlier, Deaton tells us that the poverty rate there has fallen from 53.4 percent in 1981 to 50.9 percent in 2005. Xavier-sala-i-Martin and Maxim Pinskovskiy (NBER, 2010) are much more upbeat about the prospects of poverty reduction in Sub-Saharan Africa. The authors focus exclusively on African poverty using three poverty lines; daily income of $1, $2 and $3. Translated into yearly income in US dollars, they get a value of $365 in 1985 dollars for a poverty line of $1/day. The authors provide extensive data analysis of the African distributions of income for 4 data points: 1970, 1990, 2000 and 2006. Because of this selection and the choice of the poverty lines, values, their findings are not totally comparable to those of Deaton. Nonetheless, their results on changes in the African poverty rate between 1970 and 2006 at $1/day poverty line augment what one learns from Deaton’s.
Taking the range of $1/day and $2/day poverty lines one may be able to contrast their findings with those reported by Deaton. African poverty rate for 1981 at $1/day is given as 39.4 percent. At $2/day, the rate is 64.8 percent. The number reported by Deaton is somewhere in between, at 53.4 percent for $1.25/day. The difference is not unreasonable. In 1993, according to Sala-i-Martin and Pinkovskiy the poverty rate (surprisingly) rose to 42.2 percent at $1/day and to 67.1 percent at $2/day. For 2005, the respective rates are 33.1 percent and 60.9 percent. Over the 1981 to 2005 period, the decline in the poverty rate measured at $1/day is 15.9 percent but at $2/day it is only 6 percent, which is a bit closer to Deaton’s rate of decline of 5 percent estimated at $1.25/day.
How great is the decline? Measured at $2/say, it is 6 percent over two and half decades. Good news but nothing to write Home about.
Fortunately, the story does not end there. Sala-i-Martin and co-author Pinkovskiy predict that by 2015 the $1/day poverty rate will be 22.8 percent, a decline of 10.3 percent over 10 year period (from 33.1 percent in 2005), a one percent reduction per year. That is indeed remarkable if true. What makes it so is that it is within the range reported for the previous 14 years where the rate has fallen 1.4 percent per year from 1981 to 2005. With such progress the authors predict that the poverty rate of 21.0 percent by 2015 set by the 2008 Millennium Development Goals (UN, 2008), is attainable but perhaps in the year 2017 rather than 2015.
What accounts for the poverty rate decline? Whether one accepts the numbers given in Deaton or Sala-i-Martin and Pinkovskiy the answer is simple and expected: a “decent” growth rate of per capita Gross Domestic Product (GDPP). The correlation between the two holds for all countries, whether the country is developed or developing in Africa or in the EU and the US. The question that has and continued to be asked is what accounts for economic growth and whether observed growth in any country over any period is sustainable. This is a topic for another essay. For now it suffices to point out that the driving force in the evolution of poverty “is an almost exact mirror image of the evolution of GDP per capita” (Sala-i-Martin and Pinkovskiy, p.10). If growth is sustained then the authors’ prediction for 2017 will be achieved, if not the MDG target will neither be met in 2015 or 2017.
Authors’ prediction clearly hinges on the state of affairs in the world following the global financial crisis of 2008. But there is room for hope as the world economy seems to be moving, albeit slowly towards a decent recovery.
A final note which I shall revisit in the future. The notion that $1.25/day, $2/day or $3/day as a benchmark for counting people in poverty worldwide is a “bare” and “unfeeling” statistic. Think about what $1.25 buy an individual in Timbuktu, Ethiopia or Nepal. The bold hard fact does not convey what that individual be a male, female, adult, child or an elderly consumes in terms of goods and services. The number is said to be obtained from household surveys. Given that household survey data are available what would be most enlightening is to use it to show the composition and the size of the basket of goods which the $1.25 buy in each of these countries compared to the “standard” for a decent living. Undoubtedly, one can set the rate at $5, $6, $7 or what a decent living implies.
Deacon gives us a glimpse of what a decent living means derived from data on well being measures from the Gallop World Poll (Table 8, p. 55). Using the year 2006 as the base, 37.9 percent of the world population reported “poor living standards” with the percentage rising to 38.6 in 2009. For Sub-Saharan Africa population the corresponding number is 61.4 percent in 2006 rising to 62.6 percent in 2009. These numbers tell a different story, perhaps closer to what poverty means than the sheer count of the numbers in poverty.
One can easily define what a decent living standard requires (for example BEA basket of goods and services used to determine the cost of living index in the US). What is not easy is how to get there. If indeed the world organizations and we as individuals in affluent societies care about global poverty then efforts should be exerted to enable Sub-Saharan African countries (the region with the highest poverty rate) to make substantial advances in reducing poverty. We should not be satisfied with 5, 6, 10 or even 15 percent reduction in the poverty rate over a decade with a standard of living set at $1 or even $2 a day.
---------
1 PPP are needed to translate purchasing power in one country’s currency into US purchasing power. In other words, if a good costs 16 rupees in India, with PPP exchange rate, the cost is expressed in terms of dollars.
2 To get a feel of the numbers in a comparative setting, the poverty rate in the US in 1981 was 14.0 percent at $12.65/day. In 2005 the corresponding figures are 12.6 percent at $27.32/day.
Monday, March 22, 2010
The Health Care Reform Saga: President Obama said: Get on with it and the Democrats did “Hallelujah”
Representative George Miller, D. California put it best when he said:
“Tonight we answered the call”.
Sunday, March 21, 2010 will forever be remembered as the day where a “remarkable piece of legislation was passed without a single Republican vote”.
When the dust settles, I shall get back to take up the “nitty-gritty” of the legislation.
“Tonight we answered the call”.
Sunday, March 21, 2010 will forever be remembered as the day where a “remarkable piece of legislation was passed without a single Republican vote”.
When the dust settles, I shall get back to take up the “nitty-gritty” of the legislation.
Tuesday, March 9, 2010
“The time for debate over Health Care Reform has come to an end” (President Obama -Health Care Summit, Thursday February 25, 2010)
“Let us get it done”
(President Obama address, March 3, 2010)
At the Health Care Summit which has taken place on Thursday, February 25th, 2010, the President sought to elicit support for the health care reform bill before Congress in the hope that the deadlock over its passage may be broken. Another motive more significant perhaps is to gain the support of one or more Republicans so that the passage of the reform bill may be touted as “bipartisan”. To those of us who have watched the progression of the bills (The House and Senate) from their inception more than a year ago until their final resting place in the hands of the democratic majority in the House and the super majority in the Senate, it is not only disheartening to witness the dysfunctional public sector but worse than that the egotism and self promoting public servants at the expense of those they are supposed to serve.
Having said that, it does not follow that elected public servants do not serve their constituents in voting for or against a legislation. But the spectacle of the debate on the health care reform, if nothing else it has confirmed what ordinary Americans (not the health care experts, journalists as well as health economists) have maintained for decades—that the federal government is ‘BROKEN’ that changing the man at the helm does nothing to fix it.
The 2008 campaign put forth the priority to fix the nation’s health care system. At the February 2010 Summit and in speeches given by both Republicans and Democrats there and elsewhere the public is told that the US health care system is riddled with inequities and inefficiencies and that something has to be done to correct it.
Having acknowledged these deficiencies, politicians and experts alike do not go about the business of addressing those issues in a manner consistent with the public interest but rather to promote their own ideas or better yet, their self importance.
Being a Republican or a Democratic member of Congress should not be the overriding reason to accept or reject the reform because it is put forth by a Democratic President. Our newly elected Senator from Massachusetts in his critical assessment of the reform bills before congress argued that the Obama Health Care Reform is not so good for Massachusetts. Massachusetts after all passed over the objections of some Republicans Health Care Reform that requires all Massachusetts’ residents to have proof of insurance coverage and penalizes those who do not. It is interesting that Senator Brown uses Massachusetts as an example that the reform did reduce the cost of insurance. Most significant perhaps is the fact that the Senator’s remark that what is good for the nation is not good for Massachusetts flies in the face of what the “Constitution” stipulates: The United States public sector is a federal system comprising three levels of governments: National, State and local. The legal division of responsibility among the three levels is found in the Constitution and in court interpretation of the Constitution. The Constitution divides the powers of government: Those of the national government are specified in articles I, section 8, while those of the states and their subdivisions are residual. The federal government, through Congress, was given the power to levy and collect taxes, duties, imposts and excise, to pay the debts and provide for the common defense and general welfare of United States. During the 1930’s, amidst the problems and pressures of the greatest depression in US history, there developed a Judicial interpretation of the Constitution which accepted a reading of the general welfare clause that placed no discernable Judicial limits on the amounts or purposes of federal spending (for details on federal, state and local responsibilities, see Ott, D. and A. Ott, Federal Budget Policies, Third edition, The Brooking Institutions, 1978; see also, A. Ott, Public Sector Budgets: A Comparative Study, 1993, Edward Elgar Publishing, ch. 6) Hence, the federal government and not each state has a constitutional duty to enhance the welfare of the citizens. Given that medical care enhances welfare, the federal government has a responsibility to promote the welfare of all citizens.
Disinformation along with a “heap” of unsubstantiated claims has soured the public about health reform—any reform regardless of who has originate it. In an AEI commentary “Here’s the RX for a Bipartisan Health Care Reform Bill” (American Enterprise Institute, February 24, 2010), Norman J. Ornstein addresses both of my comments. First he states that “ The plan that Obama has put up on the White House website, while basically built on the senate-passed bill as amended by the House and refined by the President, is no radical leftist plan, much less a government takeover of our health care” . Second, that “The public unhappiness with health care reform is built not on the substance here but on the distrust of Washington polls, the messy and the rancorous powers and the unease about a leap of faith to get change”.
The media and the Republicans summiteers keep repeating that public opinion is against the reform. It would be enlightening if the media were to focus a bit more on how a majority who put Obama and the Democrats in Congress are turning against one of the pillars of the Democratic agenda. But this is another story.
Let me now turn to the “Summit”. Politicians and commentators are fond of using mega phrases for an event to signal not the importance of said event but of who’s who attending the event. Merriam-Webster dictionary defines the word “summit” as “the highest point attained or attainable”. That, it “implies the top most level attainable”. In the political arena the “summit” label is meant to confer a status of the event not in terms of the issue, of “the raison d’être” of the Summit but rather in terms of who is attending the Summit.
An event, hence, is called a summit if attendees are heads of states (like the G-20 Summit) or that the attendees are highest-level officials. The Health Care Summit is clearly an event that brought together congressional leaders—officials at the highest level of government. (A detail coverage one hour after hour and who’s who at the Summit from 10:00am until 5:25pm, is given in the Washington Post, February 26, 2010)
The Washington Post, The Wall Street Journal, The New York Times as well as Research Institutions such as the American Enterprise Institute have adequately dealt with the Summit not only in terms of producing excellent summary of the issues debated but also provided their “experts’” analysis of the “contestable” provisions in the reform plan. By now, those who watched the health care reform saga unfold, and those who are satisfied with “snips” of the debate are aware of the major elements of the reform:
• Requiring health insurance coverage with penalty for lack of coverage. (The state of Massachusetts requires it)
• Regulating the insurance market by creating an oversight body.
• Cost saving through changes in Medicare reimbursements and hence the “deficit” effect.
• Expand Medicaid coverage by subsidizing state governments for services to the uninsured people who cannot afford to purchase insurance.
These are simple provisions which ought not to have taken a year’s time to formulate and certainly not to have raised the blood pressure of so many of those “high government officials” attending the Summit. But then as someone put it, “the devil is in the details”. This is not surprising given the size of the bill which is put at some 2700 pages.
Where do we go from here?
One option embraced by the Republicans and few health experts and economists is to start over. (see for example Glenn Hubbart et al “A Better Way to Reform Health Care”, WSJ, February 25, 2010). Maybe it is good business for quite a few to start over (many speeches, articles and media blitz) but for some of us and in my view the public at large this is not an option, it is a “penance”. In his third of March address, the president urged the congress to vote the “Reform Bill up or down”.
“Now it is time to make a decision. Let us get it done”.
To that there is but one word: “AMEN”.
(President Obama address, March 3, 2010)
At the Health Care Summit which has taken place on Thursday, February 25th, 2010, the President sought to elicit support for the health care reform bill before Congress in the hope that the deadlock over its passage may be broken. Another motive more significant perhaps is to gain the support of one or more Republicans so that the passage of the reform bill may be touted as “bipartisan”. To those of us who have watched the progression of the bills (The House and Senate) from their inception more than a year ago until their final resting place in the hands of the democratic majority in the House and the super majority in the Senate, it is not only disheartening to witness the dysfunctional public sector but worse than that the egotism and self promoting public servants at the expense of those they are supposed to serve.
Having said that, it does not follow that elected public servants do not serve their constituents in voting for or against a legislation. But the spectacle of the debate on the health care reform, if nothing else it has confirmed what ordinary Americans (not the health care experts, journalists as well as health economists) have maintained for decades—that the federal government is ‘BROKEN’ that changing the man at the helm does nothing to fix it.
The 2008 campaign put forth the priority to fix the nation’s health care system. At the February 2010 Summit and in speeches given by both Republicans and Democrats there and elsewhere the public is told that the US health care system is riddled with inequities and inefficiencies and that something has to be done to correct it.
Having acknowledged these deficiencies, politicians and experts alike do not go about the business of addressing those issues in a manner consistent with the public interest but rather to promote their own ideas or better yet, their self importance.
Being a Republican or a Democratic member of Congress should not be the overriding reason to accept or reject the reform because it is put forth by a Democratic President. Our newly elected Senator from Massachusetts in his critical assessment of the reform bills before congress argued that the Obama Health Care Reform is not so good for Massachusetts. Massachusetts after all passed over the objections of some Republicans Health Care Reform that requires all Massachusetts’ residents to have proof of insurance coverage and penalizes those who do not. It is interesting that Senator Brown uses Massachusetts as an example that the reform did reduce the cost of insurance. Most significant perhaps is the fact that the Senator’s remark that what is good for the nation is not good for Massachusetts flies in the face of what the “Constitution” stipulates: The United States public sector is a federal system comprising three levels of governments: National, State and local. The legal division of responsibility among the three levels is found in the Constitution and in court interpretation of the Constitution. The Constitution divides the powers of government: Those of the national government are specified in articles I, section 8, while those of the states and their subdivisions are residual. The federal government, through Congress, was given the power to levy and collect taxes, duties, imposts and excise, to pay the debts and provide for the common defense and general welfare of United States. During the 1930’s, amidst the problems and pressures of the greatest depression in US history, there developed a Judicial interpretation of the Constitution which accepted a reading of the general welfare clause that placed no discernable Judicial limits on the amounts or purposes of federal spending (for details on federal, state and local responsibilities, see Ott, D. and A. Ott, Federal Budget Policies, Third edition, The Brooking Institutions, 1978; see also, A. Ott, Public Sector Budgets: A Comparative Study, 1993, Edward Elgar Publishing, ch. 6) Hence, the federal government and not each state has a constitutional duty to enhance the welfare of the citizens. Given that medical care enhances welfare, the federal government has a responsibility to promote the welfare of all citizens.
Disinformation along with a “heap” of unsubstantiated claims has soured the public about health reform—any reform regardless of who has originate it. In an AEI commentary “Here’s the RX for a Bipartisan Health Care Reform Bill” (American Enterprise Institute, February 24, 2010), Norman J. Ornstein addresses both of my comments. First he states that “ The plan that Obama has put up on the White House website, while basically built on the senate-passed bill as amended by the House and refined by the President, is no radical leftist plan, much less a government takeover of our health care” . Second, that “The public unhappiness with health care reform is built not on the substance here but on the distrust of Washington polls, the messy and the rancorous powers and the unease about a leap of faith to get change”.
The media and the Republicans summiteers keep repeating that public opinion is against the reform. It would be enlightening if the media were to focus a bit more on how a majority who put Obama and the Democrats in Congress are turning against one of the pillars of the Democratic agenda. But this is another story.
Let me now turn to the “Summit”. Politicians and commentators are fond of using mega phrases for an event to signal not the importance of said event but of who’s who attending the event. Merriam-Webster dictionary defines the word “summit” as “the highest point attained or attainable”. That, it “implies the top most level attainable”. In the political arena the “summit” label is meant to confer a status of the event not in terms of the issue, of “the raison d’être” of the Summit but rather in terms of who is attending the Summit.
An event, hence, is called a summit if attendees are heads of states (like the G-20 Summit) or that the attendees are highest-level officials. The Health Care Summit is clearly an event that brought together congressional leaders—officials at the highest level of government. (A detail coverage one hour after hour and who’s who at the Summit from 10:00am until 5:25pm, is given in the Washington Post, February 26, 2010)
The Washington Post, The Wall Street Journal, The New York Times as well as Research Institutions such as the American Enterprise Institute have adequately dealt with the Summit not only in terms of producing excellent summary of the issues debated but also provided their “experts’” analysis of the “contestable” provisions in the reform plan. By now, those who watched the health care reform saga unfold, and those who are satisfied with “snips” of the debate are aware of the major elements of the reform:
• Requiring health insurance coverage with penalty for lack of coverage. (The state of Massachusetts requires it)
• Regulating the insurance market by creating an oversight body.
• Cost saving through changes in Medicare reimbursements and hence the “deficit” effect.
• Expand Medicaid coverage by subsidizing state governments for services to the uninsured people who cannot afford to purchase insurance.
These are simple provisions which ought not to have taken a year’s time to formulate and certainly not to have raised the blood pressure of so many of those “high government officials” attending the Summit. But then as someone put it, “the devil is in the details”. This is not surprising given the size of the bill which is put at some 2700 pages.
Where do we go from here?
One option embraced by the Republicans and few health experts and economists is to start over. (see for example Glenn Hubbart et al “A Better Way to Reform Health Care”, WSJ, February 25, 2010). Maybe it is good business for quite a few to start over (many speeches, articles and media blitz) but for some of us and in my view the public at large this is not an option, it is a “penance”. In his third of March address, the president urged the congress to vote the “Reform Bill up or down”.
“Now it is time to make a decision. Let us get it done”.
To that there is but one word: “AMEN”.
Thursday, January 14, 2010
Getting the Facts, Just the Facts about Health Care Reform
Information and misinformation is the name of the game. The plethora of articles and blogs that have been written or aired have and are still being written about the health care reform bills soon to be heading to the conference committee for reconciliation. Interest in the bill’s provisions is a good thing. Without scrutiny, debates, even falsification of facts and/or intended consequences democracy is blemished. Let me dwell a bit on that.
Some of you may recall a TV series where the actor utters the words: “facts, just the facts”. I suppose that was in relation to some narrative involving a complaint, a report on some thing or another. The idea was to cut to the meat of the issue in order to come up with the appropriate response, for without the facts and “just the facts” there would be many responses, some appropriate, others not.
The reason for this reminiscence is to assure one and all that we are indeed a democracy. One and all have the right, not only to applaud “rulers” for their efforts on our behalf but also to scorn these efforts. We are neither of the same mind, convictions, nor temperament. One may look at a picture and see a bright sky; another would see a storm looming on the horizon. No right or wrong there. One calls it as one sees it.
What prompted me to choose the title for this blog is the title of an article written by a fellow economist: Jonathan Gruber of MIT, “Getting the Facts Straight on Health Care Reform “, appearing in the New England Journal of Medicine (December 24, 2009). The author takes on the most common critiques levied against the health care reform bill passed by the House of Representatives and the bill that was then before the US Senate (since passed). The main thrust of the article is to refute these claims, but in particular the charge that the reform “represents a government takeover of the health care”. Other refuted claims (six in all), deal with some aspects of the bill(s), from cost containments, to erosion of the Medicare program. These “false” claims which are enumerated and analyzed by Dr. Gruber are not likely to go away any time soon. In a democracy they should not. False claims, if indeed false will die down eventually; their contribution is to sharpen the debate and the public awareness to the issues. Moreover, these claims and counter claims teaches us how to sort out the facts, the “just facts” from the myriad of claims for and against the reform.
Take for example the most serious attack on the reform bill: that it represents a government takeover of health care. One need not lose sleep over this claim. As Dr. Gruber (as well as few others) reminds the Journal’s readers that the Medicare program (defended by those worried about the government takeover) is a government run insurance program which started back in 1965. Had the government had a design on turning it into a national government health insurance program, it has surely failed, or better yet is taking it’s time (55 years) in doing so. But then the wheel of justice seems always to grind slowly!
As I have stated earlier about information being fundamental to the survival of democracy, one need not go too far back in the 19th and the 20th centuries to ascertain that the facts, the true facts chase the false facts out of circulation. In this New Year we shall embark on a new venture called Health Care Reform. In an earlier blog, I have put down the definition of reform as ‘to change or improve what was defective’, to ‘change for the better’. At this juncture our function as economists and the function of medical care providers is to sort out its “reform” features so that a judgment can be made as to whether one feels comfortable to call it a reform or a legislation. While waiting for such a judgment to be made, it is worthwhile to revisit the most fundamental issue that faces society today as it was faced many centuries ago: Defining the role of government and the limits to its power.
Economists, especially those of us who study and write about the role of the public sector are not of one mind. However, one thing we do agree on is that the role of the government is to address “Market Failure”. I believe that the question being debated is at the heart of this—whether or not there exists a market failure in the delivery of medical care in the US. If indeed there is a market failure, the issue then becomes: how far should the government go in dealing with the market failure.
This is the question that will be answered, not today or tomorrow, but by generations to come.
Some of you may recall a TV series where the actor utters the words: “facts, just the facts”. I suppose that was in relation to some narrative involving a complaint, a report on some thing or another. The idea was to cut to the meat of the issue in order to come up with the appropriate response, for without the facts and “just the facts” there would be many responses, some appropriate, others not.
The reason for this reminiscence is to assure one and all that we are indeed a democracy. One and all have the right, not only to applaud “rulers” for their efforts on our behalf but also to scorn these efforts. We are neither of the same mind, convictions, nor temperament. One may look at a picture and see a bright sky; another would see a storm looming on the horizon. No right or wrong there. One calls it as one sees it.
What prompted me to choose the title for this blog is the title of an article written by a fellow economist: Jonathan Gruber of MIT, “Getting the Facts Straight on Health Care Reform “, appearing in the New England Journal of Medicine (December 24, 2009). The author takes on the most common critiques levied against the health care reform bill passed by the House of Representatives and the bill that was then before the US Senate (since passed). The main thrust of the article is to refute these claims, but in particular the charge that the reform “represents a government takeover of the health care”. Other refuted claims (six in all), deal with some aspects of the bill(s), from cost containments, to erosion of the Medicare program. These “false” claims which are enumerated and analyzed by Dr. Gruber are not likely to go away any time soon. In a democracy they should not. False claims, if indeed false will die down eventually; their contribution is to sharpen the debate and the public awareness to the issues. Moreover, these claims and counter claims teaches us how to sort out the facts, the “just facts” from the myriad of claims for and against the reform.
Take for example the most serious attack on the reform bill: that it represents a government takeover of health care. One need not lose sleep over this claim. As Dr. Gruber (as well as few others) reminds the Journal’s readers that the Medicare program (defended by those worried about the government takeover) is a government run insurance program which started back in 1965. Had the government had a design on turning it into a national government health insurance program, it has surely failed, or better yet is taking it’s time (55 years) in doing so. But then the wheel of justice seems always to grind slowly!
As I have stated earlier about information being fundamental to the survival of democracy, one need not go too far back in the 19th and the 20th centuries to ascertain that the facts, the true facts chase the false facts out of circulation. In this New Year we shall embark on a new venture called Health Care Reform. In an earlier blog, I have put down the definition of reform as ‘to change or improve what was defective’, to ‘change for the better’. At this juncture our function as economists and the function of medical care providers is to sort out its “reform” features so that a judgment can be made as to whether one feels comfortable to call it a reform or a legislation. While waiting for such a judgment to be made, it is worthwhile to revisit the most fundamental issue that faces society today as it was faced many centuries ago: Defining the role of government and the limits to its power.
Economists, especially those of us who study and write about the role of the public sector are not of one mind. However, one thing we do agree on is that the role of the government is to address “Market Failure”. I believe that the question being debated is at the heart of this—whether or not there exists a market failure in the delivery of medical care in the US. If indeed there is a market failure, the issue then becomes: how far should the government go in dealing with the market failure.
This is the question that will be answered, not today or tomorrow, but by generations to come.
Wednesday, December 2, 2009
The Health Care Reform Bill: Round…?
With the Senate Finance Committee Bill has finally reached the Senate floor, it looks that a bill (with or without a public option plan) will be heading for the conference committee to be reconciled with the House Bill. By the end of the year, if not sooner, a Reform Bill will be on its way to the White House which would certainly be signed by the President. Short of a “mishap” or a “disaster” (or for Republicans a ‘miracle’), an overhaul of the US Health Care system is in our future.
Judging the outcome as ‘Good or Bad’ will await implementation of the final bill. Such judgment is not however the intent of this Blog. Given the broad outline of the bill, the issue that I would like to address here, which is in my view has been overlooked or swept away under the congressional rug is “access to medical care”.
The fact that the bill, assuming its passage, mandates that “one and all” be enrolled in a health insurance plan and that it would penalize those without insurance, the expectation is that some 31 million uninsured persons will have access to the US Health Care System. The prospect of being insured does not automatically translate into access to medical care. Let me elaborate. Unless you are covered by an employer plan, providers of health insurance (at least in my city) insist that the would be insured individual or family , (a) has a primary care physician, (b) must be registered with the primary care physician and (c) that said physician be on the insurance company approved list of physicians. Whether applying for insurance by phone, e-mail or by letter, the application is terminated (no enrollment is activated) unless and until these three (a, b and c) questions are answered in the ‘positive’. As an example, let us say that a formally uninsured person heads the requirement of the new Health Care Law and contacts say BC/BS agent. After exchanging a few pleasantries, the agent will get to the heart of the matter: take down responses to a set of questions on the enrollment form. After a few questions such as age, sex, occupation, the next question is whether the would be enrollee has a primary care physician. If the answer is ‘no’, the enrollment process terminates. The applicant could come back for enrollment after securing a primary care physician and either be seen by said physician or be on his/her register. If indeed, by some ‘miracle’, ‘good luck’ or whatever an uninsured individual has a primary care physician and that the individual is indeed registered with said primary care physician, then the next question for enrollment is whether the primary care physician is on the approved list of the insurance company. If not the enrollment process terminates. Of course, the insurance company is more than happy to supply the applicant with names from their list for the applicant to contact and once again the company agent tells the would be enrollee that once any one of those physicians accepts the applicant and be registered, the applicant can contact the insurance company again to proceed with the enrollment process.
That does not sound to be such a difficult task. In the age of the internet, it is supposed to be quick and easy to contact your chosen primary care physician(s). No such luck. It is amazing for those of us in academia (most of us any way) to contemplate not responding even in the negative to someone who address us via e-mail, phone, fax or in other media. In the case of primary care physicians you may not be able to go that “minuscule” mile.+ Talking from experience, as I shall elaborate below.
Primary care physicians who have posting on the web (most of the time those physicians are staff members at some medical school), will enumerate their expertise, specialties, research and so forth but give no valid phone number or fax—and if valid, no one responds when you call and the fax is inoperative. But that is not so bad, what is bad is that almost all with those glorious “bio” end up the write up with the “standard phrase” (DO NOT ACCEPT NEW PATIENTS). So, the search continues. The next search vehicle is to go back to the list of providers that are listed on the web of the selected insurance carrier as accepting new patients. Unfortunately, it seems that such a list is not current because at the point of contact, once again the sentence (DO NOT ACCEPT NEW PATIENTS) dwarfs everything else.
How to circumvent this? Some of us who did research or writings about comparative health care systems (US and UK) in the 1980’s and the 1990’s were, back then, smug enough to point out to our British colleagues the deficiencies of their health care system. Most of said deficiencies had to do with access to medical care: the long waiting lists for registering with a physician; denial of some procedures like kidney dialysis or transplants to some patients (those over 55 years of age)—i.e. rationing of medical care. Well, with no access to a primary care physician you might as well not bother with the quality of access.
What I have put down here is not fiction or a made up story to knock down the reform. Rather the intent is to seek a fix to a problem that will plague the health care access in the US following the enactment of the reform bill.
I, an insured person for more than 30 years, had the same primary care physician over this period, with excellent insurance coverage faced the same problem—access to services of a “primary care provider”, following the retirement in October 2009 of my primary care physician. The Group practice or clinic that was willing to take on the patients of my primary care physician looked promising enough for me to seek the services of one of their “internal medicine” physician. Having settled on one of the four, I called the office to get an appointment or as the insurance company agent have put it “get registered”. I was told sorry: this physician does not take new patients, another one, my second choice was also unavailable. Thinking that well for the time being I should register with whoever was available, I was then informed that the group practice does not accept my insurance. At that point I was not willing to continue the dialogue—not my first choice and not my insurance! At first, the group practice (a clinic or whatever it is called) responses did not in the least bother me. As the saying goes: “don’t cry over the fish that got away, there are more fish in the sea”. My search for the “elusive” primary care physician proceeded with a vigor. I decided to find out, first of all, which insurance carrier in my city has the largest list of providers; which carrier (because of something or other) has a wide acceptance by physicians, hospitals, etc and which in addition provides the type of plan I seek (PPO or Preferred Provider). Having thoroughly identified such a company (call it X company), I called to switch insurance provider. I called and get the “X” company brochure. I looked at their coverage and was satisfied that it offered the plan I sought. So I contacted the representative. I was told I can enroll by phone. Delighted (no paperwork), the process began. Guess what? Can’t proceed without “a primary care physician”. I informed the agent that my physician has just retired. Sorry about that but get another , get seen by the new primary care physician, get registered then call back to get enrolled. I was given their website to look for a primary care physician who will take new patients. Once again, I did what was expected—contact those on the insurance company list. Waiting for responses from those who did not list by now the dreaded phrase (DO NOT TAKE NEW PATIENTS), I decided to expand my search by asking a few MD specialists who have known me over the years as well as friends for help. I was delighted with their responses. I got names of at least 20 primary care physicians. I e-mailed some (I felt that as professors at a medical school, and I am also an academic professor at a University, the chances for a response even in the negative is likely); called the numbers I was given, but the response turned out to be the same. A central agency operator answered my inquiries about all the physicians I wanted to contact: “None take, new patients but you can be ‘wait listed’ on one or two”. A total waste of my time. Fortunately, a family friend, a former professor at my university suggested I contact his physician. Haleluya—the physician was on the list of the insurance carrier I wanted to subscribe. His office staff was decent enough to register me over the phone and secure an appointment for me. Having done that, I contacted the X-company insurance agent to enroll and was accepted by the insurance company to proceed with enrollment.
As my appointment with the new primary care physician is a bit far in the future, I have asked his staff: suppose that I get ill between now and then; what do they suggest I should do? Well, you would have to go to the hospital’s emergency room to be seen by the ER physician on call.
That is what I mean about ACCESS. I am not or should not be viewed as a FORTUNE teller, but the access problem which is tough enough as it is will get worse, a lot worse unless the problem of access to services of a primary care physician is addressed. Many of us have heard of communities with no primary care physician in sight, of the waiting lists (some reported some 300 people on one physician’s waiting list), the long wait for an appointment, the delay in seeing the physician and so on, but until faced with it one does not appreciate the severity of the problem. There are several reasons for such shortages. Foremost, among them is the differential in pay, prestige associated with specialization and hence the decline in enrollment of medical students in internal medicine.
A recent GAO study, (February 12, 2008),: “Primary Care Professionals: Recent Supply Trends, Projections, and Valuation of Services”, provide information on supply of primary care professionals for 2 years, the base year of 1995 and the recent year, 2005. According to the study, there was 264,086 primary care physicians in 1995 compared to 208,187 in 2005, which gives 90 primary care physicians per 100,000 people in 2005. In 1995 the rate was 80, hence an annual rate of increase of 1.17. This obviously does not give a full picture. More recent data is needed as well as the regional distribution of physicians and, the number of enrollees, office visits and waiting time. Nonetheless, the growth although miniscule should mitigate the problem if it were to continue in future years. *
Hopefully, my experience is an aberration, that there are more primary care physicians out there—if so, well and good. If not, something should be done, and done soon. It is incumbent upon our law-makers to look into this problem before hospital ER are overloaded with patients who are simply there because they have no access to primary care physicians.
A more serious issue is how to get an insurance policy without being registered with a primary care physician. Maybe insurance carriers outside of my city do not have this requirement. If so, I wish to hear from them so perhaps this requirement would be eliminated. In such a case, specialists or other medical practitioners perhaps could fill the bill.
While writing this note, I thought of the British man who was poking the sand on some beach with his metal rod searching for gold. It took him a lifetime to find his gold; I hope it doesn’t take our newly insured citizens that long to get their gold.
+ To be fair, I got one reply. Unfortunately, the physician was not a general practitioner.
* In my next Blog, I shall provide more data on physician per capita, office visits and other pertinent information. Also, a video about the Health Care Reform Bill was suggested by rosa@newsy.com which can be accessed at http://www.newsy.com/videos/health_care_reform_in_2009.
Judging the outcome as ‘Good or Bad’ will await implementation of the final bill. Such judgment is not however the intent of this Blog. Given the broad outline of the bill, the issue that I would like to address here, which is in my view has been overlooked or swept away under the congressional rug is “access to medical care”.
The fact that the bill, assuming its passage, mandates that “one and all” be enrolled in a health insurance plan and that it would penalize those without insurance, the expectation is that some 31 million uninsured persons will have access to the US Health Care System. The prospect of being insured does not automatically translate into access to medical care. Let me elaborate. Unless you are covered by an employer plan, providers of health insurance (at least in my city) insist that the would be insured individual or family , (a) has a primary care physician, (b) must be registered with the primary care physician and (c) that said physician be on the insurance company approved list of physicians. Whether applying for insurance by phone, e-mail or by letter, the application is terminated (no enrollment is activated) unless and until these three (a, b and c) questions are answered in the ‘positive’. As an example, let us say that a formally uninsured person heads the requirement of the new Health Care Law and contacts say BC/BS agent. After exchanging a few pleasantries, the agent will get to the heart of the matter: take down responses to a set of questions on the enrollment form. After a few questions such as age, sex, occupation, the next question is whether the would be enrollee has a primary care physician. If the answer is ‘no’, the enrollment process terminates. The applicant could come back for enrollment after securing a primary care physician and either be seen by said physician or be on his/her register. If indeed, by some ‘miracle’, ‘good luck’ or whatever an uninsured individual has a primary care physician and that the individual is indeed registered with said primary care physician, then the next question for enrollment is whether the primary care physician is on the approved list of the insurance company. If not the enrollment process terminates. Of course, the insurance company is more than happy to supply the applicant with names from their list for the applicant to contact and once again the company agent tells the would be enrollee that once any one of those physicians accepts the applicant and be registered, the applicant can contact the insurance company again to proceed with the enrollment process.
That does not sound to be such a difficult task. In the age of the internet, it is supposed to be quick and easy to contact your chosen primary care physician(s). No such luck. It is amazing for those of us in academia (most of us any way) to contemplate not responding even in the negative to someone who address us via e-mail, phone, fax or in other media. In the case of primary care physicians you may not be able to go that “minuscule” mile.+ Talking from experience, as I shall elaborate below.
Primary care physicians who have posting on the web (most of the time those physicians are staff members at some medical school), will enumerate their expertise, specialties, research and so forth but give no valid phone number or fax—and if valid, no one responds when you call and the fax is inoperative. But that is not so bad, what is bad is that almost all with those glorious “bio” end up the write up with the “standard phrase” (DO NOT ACCEPT NEW PATIENTS). So, the search continues. The next search vehicle is to go back to the list of providers that are listed on the web of the selected insurance carrier as accepting new patients. Unfortunately, it seems that such a list is not current because at the point of contact, once again the sentence (DO NOT ACCEPT NEW PATIENTS) dwarfs everything else.
How to circumvent this? Some of us who did research or writings about comparative health care systems (US and UK) in the 1980’s and the 1990’s were, back then, smug enough to point out to our British colleagues the deficiencies of their health care system. Most of said deficiencies had to do with access to medical care: the long waiting lists for registering with a physician; denial of some procedures like kidney dialysis or transplants to some patients (those over 55 years of age)—i.e. rationing of medical care. Well, with no access to a primary care physician you might as well not bother with the quality of access.
What I have put down here is not fiction or a made up story to knock down the reform. Rather the intent is to seek a fix to a problem that will plague the health care access in the US following the enactment of the reform bill.
I, an insured person for more than 30 years, had the same primary care physician over this period, with excellent insurance coverage faced the same problem—access to services of a “primary care provider”, following the retirement in October 2009 of my primary care physician. The Group practice or clinic that was willing to take on the patients of my primary care physician looked promising enough for me to seek the services of one of their “internal medicine” physician. Having settled on one of the four, I called the office to get an appointment or as the insurance company agent have put it “get registered”. I was told sorry: this physician does not take new patients, another one, my second choice was also unavailable. Thinking that well for the time being I should register with whoever was available, I was then informed that the group practice does not accept my insurance. At that point I was not willing to continue the dialogue—not my first choice and not my insurance! At first, the group practice (a clinic or whatever it is called) responses did not in the least bother me. As the saying goes: “don’t cry over the fish that got away, there are more fish in the sea”. My search for the “elusive” primary care physician proceeded with a vigor. I decided to find out, first of all, which insurance carrier in my city has the largest list of providers; which carrier (because of something or other) has a wide acceptance by physicians, hospitals, etc and which in addition provides the type of plan I seek (PPO or Preferred Provider). Having thoroughly identified such a company (call it X company), I called to switch insurance provider. I called and get the “X” company brochure. I looked at their coverage and was satisfied that it offered the plan I sought. So I contacted the representative. I was told I can enroll by phone. Delighted (no paperwork), the process began. Guess what? Can’t proceed without “a primary care physician”. I informed the agent that my physician has just retired. Sorry about that but get another , get seen by the new primary care physician, get registered then call back to get enrolled. I was given their website to look for a primary care physician who will take new patients. Once again, I did what was expected—contact those on the insurance company list. Waiting for responses from those who did not list by now the dreaded phrase (DO NOT TAKE NEW PATIENTS), I decided to expand my search by asking a few MD specialists who have known me over the years as well as friends for help. I was delighted with their responses. I got names of at least 20 primary care physicians. I e-mailed some (I felt that as professors at a medical school, and I am also an academic professor at a University, the chances for a response even in the negative is likely); called the numbers I was given, but the response turned out to be the same. A central agency operator answered my inquiries about all the physicians I wanted to contact: “None take, new patients but you can be ‘wait listed’ on one or two”. A total waste of my time. Fortunately, a family friend, a former professor at my university suggested I contact his physician. Haleluya—the physician was on the list of the insurance carrier I wanted to subscribe. His office staff was decent enough to register me over the phone and secure an appointment for me. Having done that, I contacted the X-company insurance agent to enroll and was accepted by the insurance company to proceed with enrollment.
As my appointment with the new primary care physician is a bit far in the future, I have asked his staff: suppose that I get ill between now and then; what do they suggest I should do? Well, you would have to go to the hospital’s emergency room to be seen by the ER physician on call.
That is what I mean about ACCESS. I am not or should not be viewed as a FORTUNE teller, but the access problem which is tough enough as it is will get worse, a lot worse unless the problem of access to services of a primary care physician is addressed. Many of us have heard of communities with no primary care physician in sight, of the waiting lists (some reported some 300 people on one physician’s waiting list), the long wait for an appointment, the delay in seeing the physician and so on, but until faced with it one does not appreciate the severity of the problem. There are several reasons for such shortages. Foremost, among them is the differential in pay, prestige associated with specialization and hence the decline in enrollment of medical students in internal medicine.
A recent GAO study, (February 12, 2008),: “Primary Care Professionals: Recent Supply Trends, Projections, and Valuation of Services”, provide information on supply of primary care professionals for 2 years, the base year of 1995 and the recent year, 2005. According to the study, there was 264,086 primary care physicians in 1995 compared to 208,187 in 2005, which gives 90 primary care physicians per 100,000 people in 2005. In 1995 the rate was 80, hence an annual rate of increase of 1.17. This obviously does not give a full picture. More recent data is needed as well as the regional distribution of physicians and, the number of enrollees, office visits and waiting time. Nonetheless, the growth although miniscule should mitigate the problem if it were to continue in future years. *
Hopefully, my experience is an aberration, that there are more primary care physicians out there—if so, well and good. If not, something should be done, and done soon. It is incumbent upon our law-makers to look into this problem before hospital ER are overloaded with patients who are simply there because they have no access to primary care physicians.
A more serious issue is how to get an insurance policy without being registered with a primary care physician. Maybe insurance carriers outside of my city do not have this requirement. If so, I wish to hear from them so perhaps this requirement would be eliminated. In such a case, specialists or other medical practitioners perhaps could fill the bill.
While writing this note, I thought of the British man who was poking the sand on some beach with his metal rod searching for gold. It took him a lifetime to find his gold; I hope it doesn’t take our newly insured citizens that long to get their gold.
+ To be fair, I got one reply. Unfortunately, the physician was not a general practitioner.
* In my next Blog, I shall provide more data on physician per capita, office visits and other pertinent information. Also, a video about the Health Care Reform Bill was suggested by rosa@newsy.com which can be accessed at http://www.newsy.com/videos/health_care_reform_in_2009.
Wednesday, October 21, 2009
The Continued Saga of Health Care Reform 2009
Many of us or at least some of us watchers of the health care reform debate are pondering the question: will it ever end? Or put differently, when will it end?
During the presidential debate health care reform was at the top of the domestic agenda and with the democratic party wining both the White House and majorities in both houses, the expectation was that, the reform bill should have a clear sailing. The president even thought that he would be signing the reform bill by the end of August or early September.
Here we are at the end of the month of October and no Bill in sight. One could argue that we are almost there. But are we?
From the news account one needs to ask: Are we or are we not serious about reforming the health care system?
Without addressing the specifics of the Senate Finance Committee bill now before the Congress (that will have to wait until a bill garners a majority in both houses—a Herculean task), let me begin with defining the term reform. In doing so, one may perhaps be able to judge the essential character of the bill if not the expectation of what the bill is likely to achieve.
The Merriam Webster Dictionary defines the term reform as: “to make better or improve by removal of fault”, alternatively, “to correct, rectify, emend, remedy, redress and revise”.
If the health care bill is to reform the existing system, then legislators and their constituents (we the people) should be inspecting the bill to see that it meets the criteria set forth to earn the reform label. The first step then is to identify the shortcomings of the existing health care system and in light of these shortcomings look for improvements, redress, corrections the reform bill legislates.
The debate, at least in the media, in my view, is misguided in that it focuses on the “private” rather than the “public” good. Moreover it fails to address the fundamentals of reforms: The principles upon which reform is based.
Our legislators, if not the media should have sought to fathom the debate along the lines used in debating tax reform. Back in the 1960’s, the 1970’s and the 1980’s no discussion of reforming the federal income tax system was deemed “legitimate” without setting forth the principles that should guide tax reform. Before getting into the “Nitty-Gritty” of specific provisions, the principles had to be agreed upon first. Since then it has become the standard for any change proposed or enacted. The well known principles were: equity, efficiency and simplicity.
So what are the principles that ought to guide the reform of the US health care system?
From my readings (albeit not too carefully) of the 259 pages of Chairman’s Mark: America’s Healthy Future Act of 2009, I cannot discern those principles.
Title I (84 pages) deals with: Health Care Coverage. It spells out the proposed insurance market reforms. It goes into details about a wide range of issues from the current insurance system’s shortcomings to setting up new procedures that would replace or amend some of the existing provisions in insurance policies as well as outlining the role of the federal government in addressing these shortcomings. Title II: Promoting Disease Prevention and Wellness (86-96 pages) deals with Medicare and Medicaid. The objective is to insure that Medicare beneficiaries have “access to comprehensive health risk assessment”. For Medicaid recipients, this section outlines the requirement for “improving access to preventive services for eligible adults”. Title III: is about Improving the Quality and Efficiency of Health Care (pages 96-135). Titles IV and V deal with transparency and program integrity, frauds, waste and abuse. Title VI (pp. 231-258) spells out changes in the revenue items like fees, tax credits and itemized tax deductions.
The “meat” of the bill and controversies surrounding the bill is found in Title I and Title VI.
Before getting into controversies surrounding provisions in Titles I and VI, one needs to ask: What are the criteria that underline these provisions?
Title I, subtitle A spells out the proposed reforms to the insurance market. These perhaps are the most straight forward reforms and well understood, having defined reform as “correcting or rectifying” what is there, then one infers that the existing health care system is deficient in meeting either the criterion of “equity” or “efficiency” or both. The corrections deal with pre-existing conditions and guaranteed renewability of policies. No controversy there. What is debatable is the specifics about premiums, rating rules in individual markets to insure compliance with the new directives. If I were to choose a criterion for these reforms the one that is applicable is “equity”. The individual cases put before us during the Town Hall meetings on health care clearly documented the need for action to stave off either bankruptcy of afflicted individuals or families whose insurance was cancelled because of pre-existing conditions or denied coverage for same reason. To providers of insurance, the new regulations give rise to cost that has to be either absorbed by those insured or recouped from them through cost shifting—a rise in insurance premium.
It will come to no one’s surprise to learn that cost shifting is the rule rather than the exception whenever a “tax” is imposed on a product. The shift may occur over time and in many instances may be hidden. Even if cost shifting does occur the insured will not bear the full cost of being integrated in the insurance pool which was denied to him previously. On equity ground as well as efficiency (spreading the cost) this provision meets the definition of reform—redressing a need.
Subtitle B: State Exchanges and Coverage Assistance and Subtitle C: Making Coverage Affordable deserve a great deal of scrutiny. In this regard the on and off “public option” need to be integrated. In my next Blog I will examine these two in light of the criteria of reform set forth above. These need to be examined in conjunction with Title VI where the revenue implications of the reform provisions are spelled out.
For the moment, it suffices to say that the state of “America’s Healthy Future Act of 2009” is in jeopardy. Unless and until the competing interests of the various players in the market are reconciled—the public option in the exchange market, state rights (whether they can or cannot opt out), Private insurers and employers as well as health care providers (physicians and hospitals), the chances for a robust bill, a bill that would meet not only the equity and efficiency of the health care market but also the criterion of simplicity is but an elusive dream.
If I were to design a “Health Care Reform Bill”, I would begin with the following questions: Does the existing system meet the standards of equity, efficiency and simplicity? To answer this question, the system has to be reduced to its components: Access, affordability and efficiency. The three components must then be ranked in terms of priority and trade off made when conflicts occur. Legislators guided by their constituents must rank the three elements. For example should access take precedent over efficiency of delivery? Should affordability be the overriding criterion, or is it the efficiency of delivery. As an economist these are the questions which have to be addressed before a “blueprint for health care reform” is developed. This may be an easy task for an economist but a difficult one for a legislator.
During the presidential debate health care reform was at the top of the domestic agenda and with the democratic party wining both the White House and majorities in both houses, the expectation was that, the reform bill should have a clear sailing. The president even thought that he would be signing the reform bill by the end of August or early September.
Here we are at the end of the month of October and no Bill in sight. One could argue that we are almost there. But are we?
From the news account one needs to ask: Are we or are we not serious about reforming the health care system?
Without addressing the specifics of the Senate Finance Committee bill now before the Congress (that will have to wait until a bill garners a majority in both houses—a Herculean task), let me begin with defining the term reform. In doing so, one may perhaps be able to judge the essential character of the bill if not the expectation of what the bill is likely to achieve.
The Merriam Webster Dictionary defines the term reform as: “to make better or improve by removal of fault”, alternatively, “to correct, rectify, emend, remedy, redress and revise”.
If the health care bill is to reform the existing system, then legislators and their constituents (we the people) should be inspecting the bill to see that it meets the criteria set forth to earn the reform label. The first step then is to identify the shortcomings of the existing health care system and in light of these shortcomings look for improvements, redress, corrections the reform bill legislates.
The debate, at least in the media, in my view, is misguided in that it focuses on the “private” rather than the “public” good. Moreover it fails to address the fundamentals of reforms: The principles upon which reform is based.
Our legislators, if not the media should have sought to fathom the debate along the lines used in debating tax reform. Back in the 1960’s, the 1970’s and the 1980’s no discussion of reforming the federal income tax system was deemed “legitimate” without setting forth the principles that should guide tax reform. Before getting into the “Nitty-Gritty” of specific provisions, the principles had to be agreed upon first. Since then it has become the standard for any change proposed or enacted. The well known principles were: equity, efficiency and simplicity.
So what are the principles that ought to guide the reform of the US health care system?
From my readings (albeit not too carefully) of the 259 pages of Chairman’s Mark: America’s Healthy Future Act of 2009, I cannot discern those principles.
Title I (84 pages) deals with: Health Care Coverage. It spells out the proposed insurance market reforms. It goes into details about a wide range of issues from the current insurance system’s shortcomings to setting up new procedures that would replace or amend some of the existing provisions in insurance policies as well as outlining the role of the federal government in addressing these shortcomings. Title II: Promoting Disease Prevention and Wellness (86-96 pages) deals with Medicare and Medicaid. The objective is to insure that Medicare beneficiaries have “access to comprehensive health risk assessment”. For Medicaid recipients, this section outlines the requirement for “improving access to preventive services for eligible adults”. Title III: is about Improving the Quality and Efficiency of Health Care (pages 96-135). Titles IV and V deal with transparency and program integrity, frauds, waste and abuse. Title VI (pp. 231-258) spells out changes in the revenue items like fees, tax credits and itemized tax deductions.
The “meat” of the bill and controversies surrounding the bill is found in Title I and Title VI.
Before getting into controversies surrounding provisions in Titles I and VI, one needs to ask: What are the criteria that underline these provisions?
Title I, subtitle A spells out the proposed reforms to the insurance market. These perhaps are the most straight forward reforms and well understood, having defined reform as “correcting or rectifying” what is there, then one infers that the existing health care system is deficient in meeting either the criterion of “equity” or “efficiency” or both. The corrections deal with pre-existing conditions and guaranteed renewability of policies. No controversy there. What is debatable is the specifics about premiums, rating rules in individual markets to insure compliance with the new directives. If I were to choose a criterion for these reforms the one that is applicable is “equity”. The individual cases put before us during the Town Hall meetings on health care clearly documented the need for action to stave off either bankruptcy of afflicted individuals or families whose insurance was cancelled because of pre-existing conditions or denied coverage for same reason. To providers of insurance, the new regulations give rise to cost that has to be either absorbed by those insured or recouped from them through cost shifting—a rise in insurance premium.
It will come to no one’s surprise to learn that cost shifting is the rule rather than the exception whenever a “tax” is imposed on a product. The shift may occur over time and in many instances may be hidden. Even if cost shifting does occur the insured will not bear the full cost of being integrated in the insurance pool which was denied to him previously. On equity ground as well as efficiency (spreading the cost) this provision meets the definition of reform—redressing a need.
Subtitle B: State Exchanges and Coverage Assistance and Subtitle C: Making Coverage Affordable deserve a great deal of scrutiny. In this regard the on and off “public option” need to be integrated. In my next Blog I will examine these two in light of the criteria of reform set forth above. These need to be examined in conjunction with Title VI where the revenue implications of the reform provisions are spelled out.
For the moment, it suffices to say that the state of “America’s Healthy Future Act of 2009” is in jeopardy. Unless and until the competing interests of the various players in the market are reconciled—the public option in the exchange market, state rights (whether they can or cannot opt out), Private insurers and employers as well as health care providers (physicians and hospitals), the chances for a robust bill, a bill that would meet not only the equity and efficiency of the health care market but also the criterion of simplicity is but an elusive dream.
If I were to design a “Health Care Reform Bill”, I would begin with the following questions: Does the existing system meet the standards of equity, efficiency and simplicity? To answer this question, the system has to be reduced to its components: Access, affordability and efficiency. The three components must then be ranked in terms of priority and trade off made when conflicts occur. Legislators guided by their constituents must rank the three elements. For example should access take precedent over efficiency of delivery? Should affordability be the overriding criterion, or is it the efficiency of delivery. As an economist these are the questions which have to be addressed before a “blueprint for health care reform” is developed. This may be an easy task for an economist but a difficult one for a legislator.
Thursday, October 8, 2009
Health Care Outcomes: Is Our System All that Bad?
An article in the Washington Post: “U.S. Losing Ground on Preventable Deaths: Despite High Medical Spending, Results Trail Other Wealthy Countries”, (Ceci Connolly, Tuesday, Oct 6, 2009). Quoting a study by Common Wealth Fund the writer states:
“Although the Unites States now spends $2.4 trillion a year on medical care—vastly more per capita than comparable countries—the nation ranks near the bottom on premature deaths caused by illness such as diabetes, epilepsy, stroke, influenza, ulcers and pneumonia”. Comparing costs and outcomes may not be all that relevant unless everything else is held constant.
The U.S. health care system has always been costlier than other systems in the developed world. Ever since OECD (Organization for Economic Development and Cooperation) has been compiling data on comparative health care, we have been put on notice that as percent of per capita GDP, the U.S. spends more and consumers of health care do not fare better, perhaps worse. This means one of two things, maybe both: The American population are either sicker than the “comparative” population hence the low return of investment on their medical care or that health care providers in the U.S. are “greedier”, “less efficient” in the delivery of health care than providers in other countries.
Let us, for a moment, accept the proposition that our providers are less efficient. The question that arises is why are they? Given the innovation that emanates from the U.S. not only on the diagnostic front but also in the drug therapy, it is worth a moment of reflection to contemplate the failure of the system to meet the efficiency standards of other European health care systems. Such reflection invariably leads us to an assessment of the disease-specific cost of intervention and there lies an ocean of difference between the U.S. system and European Systems.
Economists, rightly or wrongly, when discerning the effect of an increase in the price of good X on the demand for good X, will always tell you, “everything else remains constant”. That may sound foolish since nothing ever remains constant, or at least not for long, when good X’s price rises. We do that to ascertain the direction of effect and not necessarily the exact change in the demand. The same logic should apply to the demand for health services and hence the cost. Comparing the “comparative” cost per service delivered in one country viz a viz another in relation to the corresponding outcomes make good statistics but unfortunately masks a great deal of differences between systems. I tried to emphasize, “everything else remains constant”. That translates into comparing “like” with “like”. How can one judge life/death outcome of a diabetic patient in the U.S. compared to a diabetic patient say in France? The statistics says, a “premature death” for the U.S. patient compared to the one in France. But is this information really telling? To compare outcomes, given cost one first of all need to keep constant the profile of the patient, the environment of the patient, and a host of other issues that frame the comparison. Or take the cost comparison: It may be true that our providers are “greedy” , it may also be true that pharmaceutical pay providers to over prescribe or prescribe expensive drugs, but it is also true that the patient in the U.S. expects and demands to receive the best available medical care.
The U.S. system promotes patient’s right to choose the medical care he/she is to receive. To so many in the U.S. this right is worth the cost society has to bear. To make the cost comparison worth while patients here and there have to hold similar expectations. To make health outcome comparisons, one needs to compare like with like. Neither of these two elements hold in the U.S., European comparison.
Having said that, one should not shrug aside the three critical issues that impact costs and outcome the Post article alluded to. These are:
· The “efficiency” of the delivery of medical services;
· Access to health services , and
· Patients’ expectations
I shall address these issues in conjunction with some of the Senate bill provisions for Health Care reform 2009. Once the bills gets out of the Senate Finance Committee as the bill provisions touches on the issues raised in the Post article.
“Although the Unites States now spends $2.4 trillion a year on medical care—vastly more per capita than comparable countries—the nation ranks near the bottom on premature deaths caused by illness such as diabetes, epilepsy, stroke, influenza, ulcers and pneumonia”. Comparing costs and outcomes may not be all that relevant unless everything else is held constant.
The U.S. health care system has always been costlier than other systems in the developed world. Ever since OECD (Organization for Economic Development and Cooperation) has been compiling data on comparative health care, we have been put on notice that as percent of per capita GDP, the U.S. spends more and consumers of health care do not fare better, perhaps worse. This means one of two things, maybe both: The American population are either sicker than the “comparative” population hence the low return of investment on their medical care or that health care providers in the U.S. are “greedier”, “less efficient” in the delivery of health care than providers in other countries.
Let us, for a moment, accept the proposition that our providers are less efficient. The question that arises is why are they? Given the innovation that emanates from the U.S. not only on the diagnostic front but also in the drug therapy, it is worth a moment of reflection to contemplate the failure of the system to meet the efficiency standards of other European health care systems. Such reflection invariably leads us to an assessment of the disease-specific cost of intervention and there lies an ocean of difference between the U.S. system and European Systems.
Economists, rightly or wrongly, when discerning the effect of an increase in the price of good X on the demand for good X, will always tell you, “everything else remains constant”. That may sound foolish since nothing ever remains constant, or at least not for long, when good X’s price rises. We do that to ascertain the direction of effect and not necessarily the exact change in the demand. The same logic should apply to the demand for health services and hence the cost. Comparing the “comparative” cost per service delivered in one country viz a viz another in relation to the corresponding outcomes make good statistics but unfortunately masks a great deal of differences between systems. I tried to emphasize, “everything else remains constant”. That translates into comparing “like” with “like”. How can one judge life/death outcome of a diabetic patient in the U.S. compared to a diabetic patient say in France? The statistics says, a “premature death” for the U.S. patient compared to the one in France. But is this information really telling? To compare outcomes, given cost one first of all need to keep constant the profile of the patient, the environment of the patient, and a host of other issues that frame the comparison. Or take the cost comparison: It may be true that our providers are “greedy” , it may also be true that pharmaceutical pay providers to over prescribe or prescribe expensive drugs, but it is also true that the patient in the U.S. expects and demands to receive the best available medical care.
The U.S. system promotes patient’s right to choose the medical care he/she is to receive. To so many in the U.S. this right is worth the cost society has to bear. To make the cost comparison worth while patients here and there have to hold similar expectations. To make health outcome comparisons, one needs to compare like with like. Neither of these two elements hold in the U.S., European comparison.
Having said that, one should not shrug aside the three critical issues that impact costs and outcome the Post article alluded to. These are:
· The “efficiency” of the delivery of medical services;
· Access to health services , and
· Patients’ expectations
I shall address these issues in conjunction with some of the Senate bill provisions for Health Care reform 2009. Once the bills gets out of the Senate Finance Committee as the bill provisions touches on the issues raised in the Post article.
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