Friday, February 29, 2008

The ignored Supply Side of the Health Care Market

Expanding healthcare coverage has once again become a major issues and their have been claims that an European style system would reduce health care cost in the United States will covering everyone. There is a number of problems with this because it only address the demand side of the health care system, ie it only affects how many people are covered, how much health care services they use and how they pay for it, it does nothing to change the supply side of the health care system or the factors on that side that help to artificial push up prices. These factors include things like the American Medical Association that help to keep the number of doctors in the American market artificial low, for example putting in affect regulations that prevent qualified doctors that received their education overseas from practicing in the United States in many circumstances, the structure of how doctors practice that in many case artificial raise cost, and the way that malpractice laws are written in a number of the states. The problem with this is that if these factors are left in place any kind of single payer health care system will continue to cause price to rise or you will have to have government enforced demand rationing for non-critical medical care, as is already present in most European Countries and Canada were people that have sole the state run health insurance have to endure long waiting periods for non-critical medical procedures. In the United States, because of the supply side factors that are different from those countries, the situation would most likely end up even worse, similar to how in Illinois it is very difficult for people to find doctors that will take Medicare/Medicaid or have to wait for long periods to see the doctor. You don’t hear anyone that support a single payer system or other universal health care systems address the supply side of the market, I suspect the reason for this is that they do not want to run the risk of having to fight the insurance companies and the AMA, Doctors, ect all at once. There are far better ways to fix the US health care system than a single payers system that is used by many other countries, but it requires that will address the factors that distort both the supply and demand side of the health care system.

Friday, February 22, 2008

trade policy and manufactoring jobs

Recently there have been a number of people that have blamed foreign trade for the decline in the number of manufacturing jobs in the United States, but this is mainly wrong, while undoubtly some manufacturing jobs have left the United States due to freer trade policies, it is not the main reason for the decline in manufacturing jobs. The main reason is the increasing productivity of the American work force in general and in the manufacturing industries in particular and improved production process and that have allowed more industrial output to be produced with fewer workers and inputs, to be exact between 1980-2003 manufacturing outputs in the United States has increased by 93 percent. Productivity has been the main reason for this, manufacturing productivity has grown at almost twice the rate of the average for non-farm business, but demand for these products have grown at a far slower rate meaning that it takes fewer workers to met demand and that has been the main reason for the falling percentage of workers in employed in the manufacturing industry as a percentage of overall employment and as percentage of GDP.

Trade restrictions would only harm the American economy in the long run, while it would probably protect some jobs, the cost to the larger economy would be greater than the “value” of those jobs protected. The reason for this is that protectionist trade policies create distortions in the larger economy as companies and consumers are no longer able to buy from the lowest cost producer, they end up paying more for the products they buy from the protected industry and this in turn effects the decision they make about buying goods and services from non-protected industries. For example take the automobile industry, it buys a number of components parts for it product from other countries because it cheaper, if they were required to buy it from domestic producers that would charge a higher price, this higher price would be end up being included in the final price of their product, the car, truck, ect that they produce. This will have a couple effects on the economy, one the higher car prices will lead to fewer cars being sold, which in turn will reduce the revenues and profit earn by the car company and this will lead to them either lay off workers, higher fewer workers in the future or paying lower wages, or some combination of the three. The second effect comes from people that do still buy cars having to pay more for each car they buy, which in turn will leave them less to spend on other goods and services, this means that non-protected industries will see their revenues and profits fall, which in turn will lead them to lay off workers, higher fewer works in the future or pay lower wages. These effects are the reason that protectionist trade policies will end up costing the economy more than the “value” of the jobs protected.

For that matter there is little reason to worry about a the American economy running out of good paying jobs, since the 1980s the number of high paying jobs in management and in specialized professional jobs has roughly double, growing at a rate that is far higher than the rate of population growth, and the percentage of the total jobs in economy made up this has increased from 23% to 30%, and 9 million jobs in this area are expected to be added by 2012.

The people that are calling for trade restriction do so for a number of reason, many of them because they are misinformed, other because they are jobs that have been lost for one of the above reason and are looking for some to blame, but many of people that are calling for protectist trade policies do so because they stand to benefit economically at the cost of the larger economy and most of the public.

Friday, February 15, 2008

short term stimulus, saving and long term economic growth

On the news I have heard a lot of economic analyst talk about how it is good for the individual person if he saves, but bad for the economy if everyone saves because it reduces demand for goods and services, or in economic terms consumption, and hurts economic growth and despite how wide spread you hear this and how it is repeat by many Keynesian Economist it is wrong for the most part. While it is true that reduce the amount of goods and service people buy in the present and can slow economic growth in the short run, in the long run it will usual raise economic, expect in the case if you had people doing an extreme amount of saving, i.e. like over a 25% of their income but the saving rates is not any where near that in the United States so it doesn’t matter or if you had them saving by hording money under a mattress or something similarly unlikely. Higher saving rates increase the amount of funds that are available for investment and higher rates of investment means stronger economic growth in the future. An increase in investment means that there will be more capital per worker in the economy, I am using the word capital in the most broad based sense that an economist would use it, so that it could refer to anything from more a business opening a new branch or factor, buying better equipment, investing in new technology, increasing the amount of training that it gives each worker, ect, but what all of this translates to is that on average workers in the economy become more productive and as productivity increase the amount of the goods and service that each person produces rise and the economy grows fasters. Also more productive workers earn higher wages which allows them to both save more and buy more goods and service increasing economic growth even more. Along with that the return that people earn on their investment will allow them to consume more in the future, which in turn helps to raise future economic growth.

Instead of short term stimulus plans that encourage people to spend more the Federal Government should, along with control spending and taxes, be looking at ways to encourage people to save more. Ways that they could do this would be to increase the amount of money that people that put into investment tax shelters like IRA, both traditional and Roth, 401Ks and reducing or eliminating the taxes on capital gains and dividends, all of which would increase the returns that people could expect to receive on their investment, since it would decrease the amount of money they would have to pay to the government in taxes off the money they earned on their investments and higher rates or return serve to encourage people to invest. A long with this the Government should seriously look and debate the idea of replacing Social Security retirement benefits with private accounts for younger workers.

Thursday, February 7, 2008


The results from Super Tuesday have given us answers on one side of the race and no answers on the other. On the Republican side the race is over with McCain now almost certain to be the nominee, particular with Romney now out of the race and the Democrat side the race is still neck and neck. I would expect that if the Democrat race turns into a long drawn out bitter fight that ends closely, that it may be hard for the Democrat to completely reconcile before the general election and that could hurt them, particularly if McCain can unite the Republican party and use the down time to replenish and build up his war chest.

The most interesting things on the Republican side was how well that Huckabee did, it seems that he brand of populist social-conservatism appeals to fair number of people, particular in the South and some parts of the Mid-West. Which make sense since many of these areas were the hot bed areas of past populist movements. The other thing that may be of interest is if this is the start of new movement with in the Republican Party. I for one hope not because populism cares with bad economic policies.

Friday, February 1, 2008

Jim McConoughey for Congress and the economy

At the start of this election cycle I was supporting Aaron Schock for US Congress from the Illinois 18th District, but after the way he handled a number of things and more importantly after talking with Jim McConoughey one on one I came to the conclusion that he is the best choice. He has a strong grasp on economics and economic policy which something that we need more of in Congress and he has the skills to be a strong leader. Schock might still have a bright future in front of him, but today should be belong to McConoughey and I hope everyone in the 18th district that reads this will vote him on Tuesday Feb. 5th

On the subject of the economy, there has been a lot of fear mongering in the media and for the most part it is wrong. Yes the financial markets have been very volatile the last month or so and that has been due to a number of things including the sub-prime problem, but a lot of it is due to the bad handling of the situation by the Federal Reserve System. The Federal Reserve System has not handled this well particularly with their surprise over night cut in the interest rates a few weeks ago, regardless of whether or not it was need, the Fed went about it in away that was going to cause problems in financial markets. Stock values are based by in large off expected future returns which in turn those expectations are largely based off what people thing the economy is going to do in the future, and a surprise closed door decision to cut interest rates like send a single that we enter a major economic downturn, even if we arent, which is the case this time.

The damage caused by the sub-prime problems to the large economy has been relative small and over time the economy will work the problems out relatively quickly. The bigger threat is the Fed will continue to follow a bad monetary policy and Washington will use this as an excuse to increase spending, particularly deficit spending, and increase the rate of inflation with out producing any economic or job growth, stagflation, and to under take an number of policies that will not have any real long term effect, tax rebates, while not fixing the real problems of the government that have harmed the economy, an inefficient tax system, government spending that is to high and continued deficit spending, doing this will go a lot father to help the economy.