Dr. Sherry Jarrell

Economy Stronger without Bailout! Proof? Cash For Clunkers!

There is absolutely no doubt that the economy would have been better off today without the bailout and the omnibus spending bill.  See my previous posts on the Damage of Government Spending and the True Cost of Government Spending.  Every dollar of tax revenues sucked out of the private economy and used as government spending costs the economy upwards of 50 cents.  Every dollar of tax revenue kept in the private economy is either used as consumption which keeps the economy going in the short run (presuming they are consuming products and services produced by the private economy), or investment in capital and equipment and innovation, which is the sole source of productivity and growth in this economy - nay, in the world economy.  

You need look no further than the overwhelming response to the "Cash for clunkers" program which was essentially a tax rebate on a durable good.  Imagine where we would be today if the $787 billion "stimulus" program has been used as an across-the-board tax rebate?  Better?  Okay, now imagine how much better off we would be if the $787 billion had never been confiscated from the private economy in the first place!  My point exactly.

I am not saying that the "Cash for Clunkers" was a smart program. On the contrary, it is a prime example of government manipulation our private lives in a way they think is politically correct. And it is a massive shell game fraught with deception and feel-good sound bites.  If I own a clunker, that is my choice.  If it pollutes and I choose to keep it and pay the costs of pollution, that is my choice.  Clunkers may very well save the life of my 15 year old daughter, who just starting driving.  I want her safe and alive should she have an accident.  And that is MY choice, not the choice of OBAMA and gang.  He can raise his children as he sees fit, and I will do the same, thank you very much.  Now why don't the so-called economists who surround Obama cough up the data showing the REAL costs of this program to the American people: in addition to the price paid for the clunker, we also incur the costs of writing and monitoring the program, the car dealers' time and expense in implementing the program and filing the paperwork, and the collection and disposal (?????) of the clunkers themselves.  And every one of those dollars spent began life as a dollar of OUR HARD-EARNED INCOME.  My goodness, talk about your social engineering. What a joke.  

The Damage of Government Spending

It seems to me that many of the debates in Washington and the business press about TARP, the budget, the deficit, health care reform, the cash for clunker program, cap and trade, and so on, cloud a very important, very fundamental issue: the fact that Government spending replaces the preferences and choices of private businesses and individuals with the collective choices of local and national politicians.   These politicians do not personally consume the goods and services purchased. The spending is ostensibly authorized for "our benefit."  Of course, the politicians also want to please their constituents in order to raise funds and get re-elected.  

Government spending is fundamentally a different animal than private spending. Private spending is the essence of the freedom of choice.  When you mull over the decision to purchase an item, you are making a very personal decision based on your current income or resources, the prices of the other goods and services you currently purchase or may purchase, and your personal tastes, risk preferences, needs, and wants.  You make so many mental comparisons and tradeoffs when you consider a purchase that they truly cannot be listed.  And then you live with the consequences of your choice, for better or worse.  If bad, you learn.  If good, you enjoy.  And the process repeats itself every time you make a buying or investing decision, updated with new personal, private information on the circumstances, choices, and preferences of the individual.

Government spending, on the other hand, involves a huge middleman who first decides that they do not approve of our spending choices.  If they did, there would be no need for government spending.  So, they decide that they don't like how we decide to spend our income, and they take income from private business and individuals (out of business income, which also generates the wages from which individual taxes are collected) in order to spend it on goods and services that they think we should have bought, but didn't.  And in the process, they shrink the disposable income available to support our private decisions on spending and saving.

The motivation behind government spending is not what we decide is good for us or preferable. It is what some collective group of people "out there"....in other states, on certain Congressional committees, working for certain causes or who have particular political points of view...feel we should be purchasing. That is extremely powerful, in part because no one individual behind the government spending is really accountable for any particular purchase.  It's "purchases by committee."  And the individual is essentially powerless to change it if they disagree with the particular spending programs that government authorizes.  I know.  I strongly disapprove of the current government spending programs and am powerless -- other than this blog and my one vote -- to do anything about it.

Now, I understand that there are some goods and services that are necessary for the safety, security, and functioning of our country that would not be provided if left to the purview of private individuals and businesses, like defense, highways, and other public goods.  But there must be a limit --  a strict, unforgiving limit -- or we will slide along the spectrum away from a free society with limited government spending toward socialism, where all spending is determined by the government and individuals are no longer self-determined.  Once people are dependent on the government to make their spending choices for them, there is very little chance of ever turning back.  We have proof all around us.  When is the last time a program was actually cut in any real sense?  And when state budgets are cut, when the arts get less funding, when the "clunker for cash" program is suspended, there is an uproar.   Some group that was getting a handout, that was getting a free ride from our tax dollars that we would have used to purchase some good or service that we preferred or to invest in our future or to start a business or to donate to charity....that group will complain loud and hard about the cutback in a program that should never have been authorized in the first place.   

Top 10 Shocking Healthcare Fraud Examples

This information was too important not to share...now imagine the magnitude of the fraud with the government running the entire health care system.  

http://www.healthtransformation.net/cs/top_10_shocking_fraud_examples).

1. Improper Payments - Improper payments - According to a January 2009 GAO report, improper payments to providers that submit inappropriate claims can result in substantial financial losses to states and the federal government. Medicaid payments can be improper for various reasons, such as if people served are not eligible for Medicaid. Measuring improper payments within the Medicaid program is important to recouping and reducing them. For fiscal year 2007, CMS issued its first full-year Medicaid improper payment rate estimate of 10.5 percent, or $32.7 billion (the federal share is $18.6 billion). Identifying and reducing improper payments in Medicaid are important first steps toward improving the integrity of the program.^[1]
2. Deceased Doctors- The Senate Permanent Subcommittee on Investigations recently reviewed Medicare claims from 2000-2007 and found significant payments for medical services ordered by over 16,500 dead doctors – between $60 million to $92 million.  Some doctors had been deceased for more than 10 years ^[2] 
3. Sham Companies - The U.S. Government Accountability Office found that almost $1 billion of $10 billion in annual Medicare payments made for durable medical equipment (DME) is improper.  GAO highlighted this lack of federal oversight by setting up two fictitious DME supplier companies with no clients or medical inventory to supply to patients, both of which were nonetheless approved by CMS for Medicare billing privileges.  A specific individual, after stealing beneficiary numbers and physician identification numbers, submitted $5.5 million in claims for three fraudulent offices.^[3] 
4. Abusing Homeless - Facilities in southern California allegedly churned thousands of indigents through their sites and billed Medicare and Medi-Cal for costly and unjustified medical procedures.  These facilities ran street-level operations, where runners collected indigents for unnecessary hospital services, and dropped them back off on skid row by ambulance.^[4] 
5. False claims for HIV Drugs – In southern Florida, dozens of clinics and doctors billed Medicare for more than $1.1 million in false claims for obsolete HIV-infusion therapy for a single Miami-Dade County patient, who then collected thousands of dollars in kickbacks for selling his government-issued healthcare number to them.  The patient then used the money to buy crack cocaine.^[5]  In fact, in 2007, Florida accounted for 80% of drugs billed across the entire United States for Medicare beneficiaries with HIV/AIDS, even though the region only had about one of 10 eligible patients.^[6]
6. Goods Never Received - A recent enforcement effort in Miami led to charges against 120 people and a corresponding $1.4 billion drop in Medicare billing in the area.  Federal officials pointed to a red electric wheelchair seized from an illicit company. The wheelchair should cost about $5,000; by billing Medicare over and over, while never delivering the wheelchair to an actual patient, criminals charged $5 million for this one item alone.  A retired federal judge also got notice from Medicare explaining a recent treatment he had received, including two prosthetic arms.  FBI agents came to his house to take pictures of his real arms to prove that they had not, in fact, been amputated.  No cross-checks had been made within Medicare to verify whether the patient actually had amputations performed.^[7]
7. Stolen Medicare ID– An 82-year-old patient had her Medicare ID stolen.  Fake providers then used that number to bill Medicare for tens of thousands of dollars – for care and equipment she never got and didn’t need – including AIDS medicine, a wheelchair, and artificial knees, ankles, and an eye.  The patient complained to authorities on several occasions, but no prosecutions were ever made.^[8]
8. Incomplete Claims – Investigators from the Senate Permanent Subcommittee on Investigations found that, between 1995 and 2006, $4.8 billion in Medicare payments were made for bills submitted with diagnosis codes that were invalid of blank.  Some used smiley faces or exclamation points, but the bills were still paid.^[9]
9. Inappropriate Treatments– The Senate Permanent Subcommittee on Investigations reviewed bills submitted by medical suppliers from 2001 through 2006 and found over $1 billion in questionable claims.  For example, there were hundreds of thousands of claims for diabetes-related glucose test strips for patients who were diagnosed with the bubonic plague, leprosy, and cholera.  Their study also found walkers being issued and claimed for patients whose diagnosis codes included sinus congestion, paraplegia, and shoulder injuries.^[10]
10. One State Alone- In 2005, the New York Times estimated that NY Medicaid fraud reached into the tens of billions.^[11]  Some specific cases:

• A Brooklyn dentist “performed” as many as 991 procedures in a single day
• School officials enrolled tens of thousands of low-income students in speech therapy without the required evaluation, garnering more than $1 billion in questionable Medicaid payments.  One school official sent 4,434 students into speech therapy in a single day.
• Several criminal rings duped Medicaid into paying for an expensive muscle-building drug intended for AIDS patients, which was diverted to bodybuilders at the cost of tens of millions.

 

^[1]  GAO, “High-Risk Series – An Update,” January 2009

^[2]Senate Permanent Subcommittee on Investigations Press Release, “Coleman, Levin Investigate Millions in Medicare Payments for Claims Tied to Deceased Doctors,” July 8, 2008

^3]  GAO, “Covert Testing Exposes Weaknesses in the Durable Medical Equipment Supplier Screening Process,” July 2008 

^[4]  LA Times, “3 Southern California hospitals accused of using homeless for fraud,” August 7, 2008 

^[5]  Miami Herald,  “Congress tight with Medicare anti-fraud funds,” August 11, 2008 

^[6]  Reuters, “Fraud and Florida’s Multimillion-Dollar Wheelchair,” October 22, 2007 

^[7]  NBC News, “Blatant Medicare Fraud Costs Taxpayers Billions,” December 11, 2007 

^[8]  NBC News, “Criminals Find Medicare Easy to Defraud,” December 12, 2007 

^[9]  USA Today, “Report:  Medicare Spending Billions on Suspicious Claims,” September 25, 2008

^[10]  USA Today, “Report:  Medicare Spending Billions on Suspicious Claims,” September 25, 2008

^[11]  New York Times, “New York Medicaid Fraud May Reach Into Billions,” July 18, 2005

The Truth about the Health Care Plan

What is the purported goal of the President’s Universal Health Care reform?  I’ve been doing a lot of reading and listening on this issue and have summarized the most common claims in the following short list.

To make sure that all currently uninsured U.S. citizens have medical insurance.
To make sure that all U.S. citizens receive basic medical care.
To limit national spending on health care. 

How does the bill propose to accomplish these goals?  Let’s take each in turn.

“To make sure that the uninsured have medical insurance.”  The only way to guarantee that everyone who currently doesn’t have insurance gets insurance is to require it.  And if the government requires it, they have to have a way of paying for it, which means either increased taxes or a mandate for individuals and businesses to buy insurance that they do not now choose to buy.  In addition, in order to meaningfully require that everyone abides by the new law, there has to be a mechanism for monitoring, enforcement, and fines for those who fail to comply.  Sure enough -- it’s all there in the bill (the bill that neither the President nor Congress has read).

“To make sure that all U.S. citizens receive basic medical care.”  Let’s see.  Fundamentally, “receiving medical care” means that a patient sees a doctor.  It means that services are provided by the doctor and consumed by the patient. These services are not free: they use resources; they are valuable; they take time.  We can place a dollar value on these resources, regardless of the specific currency – private income, public tax revenues, bartering, or waiting -- used to pay for them.  How would the legislation ensure that everyone received basic medical care?  It would first have to define what kinds of treatments are considered basic; then it would have to require some sort of monitoring system to document that those services were received, and some sort of penalty if a person failed to receive them.  It would have to require that the right number of doctors provided the right kinds of medical services in the right geographic areas (a nightmarish concept in and of itself) and it would have to compensate the doctor for providing the service.   Of course, in order to pay for all this, the plan would have to limit the compensation for the doctor, which leads us to ….

“To limit national spending on health care.”  Or, as President Obama puts it, to “curb rising health care costs.”  What does this mean exactly?  How is legislation that forces demanders and suppliers of a service to come together in ways they now choose not to do going to make the production of that service more efficient?  (efficient means that more outputs of the same quality are produced from the same inputs….this is the ONLY way that the cost of medical service is lowered….) What single piece of evidence do any of us have that the health care plan will lead to improved medical care for either the individual or the nation as a whole?  Medicaid?  Medicare?  No, these are the very programs Obama references when he laments skyrocketing U.S. health care costs, and the primary impetus for the push for reform. Canadian or UK health care? Hawaii’s failed Universal Health Care experiment? No; each of these programs serves as a warning about the sorry state of our future should the Health Care bill pass.

The fact is that, despite the feel-good sentiment linked with the idea of Universal Health Care, the reality would be a disaster.  None of us would benefit; all of us would suffer lower quality, rationed health care services.  There is simply no other way around it.

Finally, as an economist, I have to comment on the analyses I have seen on this issue by other economists.  I have been very surprised and disappointed by them, on the whole.  I have seen claims by other economists that health care reform will actually save states money, increase the number of high-quality jobs, lower the unemployment rate, and improve the growth rate of the U.S. economy.  I hate to be the bearer of bad news, but these claims are just plain false. I could quote excerpts and detail step-by-step where the reasoning fails, and I’m happy to do just that if asked, but I will spare you!  Basically, these analyses are bogus for one of two reasons:  one, they ignore that tax revenues are foregone private income and; two, that individual choice is always better than decision-by-committee.

Credit Crisis Explained

....back from vacation....

Let’s all agree first on the definition of the recent U.S. credit crisis. Basically, it was a reluctance of lenders to lend, at almost any interest rate, because of the heightened degree of uncertainty in the market.  What caused the credit crisis?  Of course, the answer is multifaceted and complex, the result of a vast array of interconnected, dynamic factors.  But as with most market activities, there is a very straightforward explanation for the problem based on supply and demand.  Let’s keep it simple, and paint with a very broad brush, but let’s get the causality right. 

In this case, the mortgage market was functioning well.  Bankers and home buyers were negotiating mortgages one-on-one quite successfully on the whole.   Bankers gathered information on the borrower and used it, along with more general local and national market information, to set rates and loan conditions that fairly compensated them for the risks of default and prepayment.    Some borrowers shopped lenders to find the best deal; some used the same bank that held their checking or savings account. Of course, there were unexpected defaults and prepayments:  contracts neither predict nor control the future.  But that’s what investments and loans and interest rates do:  trade dollars today for uncertain payoffs tomorrow ….move liquidity from savers to borrowers…. voluntarily …. at fairly negotiated rates …with no guarantees of a certain outcome.  And no one forced anyone to accept a mortgage loan they didn’t want. 

Some hopeful homebuyers were turned down for a mortgage because they were not creditworthy.  The rate they would have had to pay to compensate the lender for the risk of default was too high; the “price” of the mortgage – including the interest rate, down payment, fees, insurance and so on -- was too high for them given their income, the price of other goods, and their preferences.    Again, this is a voluntary, free-market outcome.

Now introduce politics into the picture.  Some politicians believed that home ownership was a fundamental right. Some felt they knew better than the private market who should get a mortgage, at what interest rate, and under what conditions.  Laws were passed and mandates issued requiring banks and other lenders to approve mortgages they would have otherwise denied, the so-called “subprime” mortgages. 

Many of these politicians justified the new laws and mandates by citing the positive consequences home-ownership has on local communities, including higher employment, tax base, sales of durable goods like refrigerators and dishwashers, and investment in local business.  But this line of reasoning distorts the true underlying cause: home-ownership does not cause these positive side effects.  The ability to afford a home is what causes these positive developments. And what enables the ability to afford a home is diligence, a solid work ethic, living within your means, saving, and responsibility – the very same factors that a lender takes into account when determining whether to grant a mortgage and at what interest rate.  

These mandates and regulations would have had minimal aggregate effect on the market for mortgages if not for Fannie Mae. Fannie Mae was created by the government in order to reroute liquidity from one group to another; it did not evolve from natural, competitive forces to satisfy market demand.  Instead, it was created through legislation to satisfy a political demand for social engineering. Banks approved subprime mortgages that they would have otherwise denied, even with the mandates, in large part because they could quickly and reliably get them off the books by selling them to Fannie Mae (and the other enterprises that evolved around Fannie Mae).   Fannie Mae then took the mortgages, mixed them together in a big pool of future cash flows, and sliced and diced them into several new financial securities.  Fannie Mae used the funds generated by the sale of these securities to go back to the banks to buy more mortgages, and the cycle begins again.     

In order to describe how the mandates and Fannie Mae contributed to the credit crisis, I have to first explain the concept of diversification.  Diversification is the reduction in risk (or uncertainty) per unit return.  It occurs when assets with imperfectly correlated returns are held together in a portfolio.   (Note that diversification does not reduce the average return of a portfolio, a common misperception.  It reduces the variability of the portfolio’s return around the average return.)  

My conjecture is that the financial models used to price mortgage-backed securities created from the Fannie Mae pooled funds overestimated the impact of diversification on the asset returns, underestimated risk, and served as a catalyst for the credit crisis.  Basically – and I am grossly oversimplifying the process here – it was assumed that if one mortgage went into default, another would offset or minimize the impact on the portfolio return. But this was not the case in 2009, for a variety of reasons, all of them economic. 

First, the supply of single family homes increased during this period. Why?  If you were shopping for a home in the 2000-2001 period, you likely already know the answer.  Your real estate agent or mortgage broker very likely asked you if you were planning to stay in the home or move in a few years.   If you planned to move, the agent probably recommended an adjustable rate mortgage with a rate that would effectively reset in five to seven years. In that case, if interest rates rose, you could “sell the house for a higher price and pay off the mortgage.”   Rates did rise, and lots of people were trying to sell their home in 2008 and 2009.  A higher supply means a lower price, which put more people upside down on their mortgage.

Second, the overall economy was in a slump in 2009.  Lower GDP means lower incomes and more people struggling to make their mortgage payments.  Higher unemployment means less job security and fewer people buying homes.   Lower demand for houses means lower home prices, and more people upside down on their mortgages. 

Third, these economic and political developments-- an oversupply of homes, weak demand for homes, and mandates that created a disproportionate number of high-risk mortgages -- combined to create a perfect storm for mispricing the risk of mortgage-backed securities (and the insurance and derivative products they produced).  The result was a strong positive correlation between the state of the economy and the default rate on mortgages.   As noted above, a positive correlation between the returns on assets diminishes the diversification benefits from pooling assets into a portfolio.  The magnitude and timing of the positive correlation was largely unanticipated by the market and assigned a very low probability in the scenario analyses of the risk-management models.    The result?  Mortgage-backed instruments and their derivatives were mispriced; their risk was underestimated and return overestimated.   Foreclosures ensued, liquidity dried up, Congress blamed Wall Street and threatened more oversight and more regulation, when it was the interference from Washington in the private sector that caused the problem in the first place.