Making the Theory Work

Charles Kettering, a former head of General Motors Research once observed, ( in theory)“There is no difference between theory and practice. ( in practice) There is one difference. Practice won’t let you forget anything or leave anything out. In theory, problems are easily solved because you can leave something out.”

While he made that statement at least 72 years ago, climate advocates have latched onto the part about problems being easily solved by leaving something out. What they leave out is observational data that conflicts with their preferred assumptions.

Those who rely on the climate orthodoxy to promote their agenda are wedded to the results of complex computer models that have been constructed to demonstrate that the increase in CO2 emissions inevitably leads to dangerous warming. What they leave out is the fact that their model projections overstate warming. This is shown in the following graph produced by Professor John Christy.

The explanation for this difference is that the models assume a greater climate sensitivity than is demonstrated by the climate itself. According to the National Academy of Sciences, climate sensitivity is “the equilibrium global mean surface temperature change that occurs in response to a doubling of atmospheric carbon dioxide (CO2) concentration. Climate sensitivity is a function of numerous feedbacks among clouds, water vapor, and many other components of the earth’s climate system. It is presently one of the largest sources of uncertainty in projections of long-term global climate change.” The NAS went on to say that some uncertainties could be reduced or removed if there were better temperature records and better estimates of past radiative forcing. That falls into the category of wishful thinking because the records and estimates cannot be rehabilitated. There are too many variables involved with past temperature records to significantly improve their accuracy.

Analysis by Professor J. Ray Bares, University College Dublin, concludes that models underestimate the amount of heat radiated into space from the tropics. This conclusion is consistent by Dick Lindzen’s research demonstrating an “iris” effect in the tropics. In addition, Pat Michaels’ work on climate sensitivity shows that studies since 2011 estimate a lower sensitivity than the IPCC or the models that are used to project warming.

So, why do advocates of the climate orthodoxy cling to predictions of catastrophic warming when more recent research confirms a lower climate sensitivity as does the climate itself? There are several plausible explanations. One is that many are very risk adverse and believe in the Precautionary Principle which in Dick Lindzen’s words, “Everything is uncertain, thus anything may cause anything, and thus we should do something about it.” This is taking an abundance of caution to the extreme.

Another explanation is that some environmentalists have strong objections to economic progress and the way in which it is achieved. They want to control the means of production and how the economy evolves. Of course, they also happen to be high up on the economic ladder, so they can be cavalier in wanting to deny the benefits of economic growth to others.

In the end, if extreme energy policies are the mechanism for responding to climate change, resources will be wasted and the impact on warming and its climate effects will be imperceptible.

The Slow Walk to Silent Surrender

More and more businesses and industries are buying into the climate orthodoxy that human activities are the primary cause of climate change .  And, democratic candidates for President are making it a wedge issue that will put further pressure on business and industry to get on board.

While a large number of scientists support this hypothesis, for a variety of reasons, it still is only a hypothesis that relies on complex computer models that have been built using a large number of assumptions that attempt to fill gaps in knowledge.  While short term business objectives may justify going along to get along, there is an unexplored alternative that would not compromise the business community and damage our economic system.

Instead of being politically correct and accepting the climate orthodoxy and the actions that flow from it, industries and businesses should lay out an action oriented agenda that neither accepts or rejects the orthodoxy.

The United States is making more progress than most developed countries in reducing greenhouse gas emissions, some of which is the natural evolution of technology and some due to wrong headed policies that suppress fossil fuel use.  

Instead of accepting renewable standards biased in favor of wind and solar, a focus on incentives to shift to natural gas and revive the nuclear option would be more cost-effective.  Nuclear has two big hurdles—fear and cost.  The fear that has resulted from nuclear accidents that did not result in any casualties can be addressed by a well developed communication initiative that focuses on why nuclear should be the preferred option for reducing emissions and why it is in consumers interests to support it.  The cost issue is more difficult but it is not an insurmountable hurdle.  Two major cost drivers are the regulatory approval process and the lack of reactor standardization.  The progress being made with smaller modular reactors holds promise in lowering costs, increasing public comfort and, in competing with wind and solar.  The case needs to be made for a level playing field in power generation benefits consumers so that alternatives can be judged fairly.

The unneeded and wasteful subsidies for ethanol should be eliminated by demonstrating that tail pipe emission standards can be met without an ethanol mandate and that the production process actually leads to an increase in CO2.  Ethanol manufacturers should not be given a free ride.

Sea level rise, independent of the human component, is a serious problem but one for which near term solutions are readily available.  Coastal regions need to revise building codes so that new structures are not allowed so close to the waters’ edge that damage from sea rise and coastal storms is almost inevitable.  Currently, flood insurance is subsidized by the Federal Government, lowering the true cost of insuring coastal structures.  This subsidy should be eliminated.  Most of the Netherlands is below sea level and yet the Dutch have developed technology for mitigating the effects of flooding, Industry should support a vigorous program to adopt some of that technology.  

While the natural process of decarbonization is taking place, industry ought to support and participate in research to better clarify and define the extent of human influence on climate as well as of other factors identified by the IPCC. The  IPCC identified uncertainties provide a solid basis for a collaborative research program for demonstrating that the science is not settled and developing a better understanding of factors beyond CO2 that influence the climate system.

For over 20 years, estimates of climate sensitivity have varied by a factor of three. Research should be pursued to make that estimate more precise.  Over the same time period, Danish scientist, Henrick Svensmark has been conducting research to better understand the effect of solar activity on climate and to demonstrating how solar related mechanisms affect cloud cover and cloud formation. Additional solar related research should make clear that the effect of solar activity on warming has been underestimated in making attribution determinations.

A recent audit of temperature data by Dr. John Mclean has raised serious questions about the data bases that are the foundation for models and projections of future climate catastrophes.  The data bases from the Hadley Center and NOAA should be independently audited to validate or refute McLean’s findings.  We already know from work by Professor John Christy that US temperature measurements have seriously over estimated actual temperatures. 

 Collaborative research on natural variability, the actual impact of increasing CO2 levels since the warming effect is not linear, and on improving models in order to add to our state of knowledge and demonstrate that industry is being part of the solution and not the problem.

Americans are sorely in need of being educated on what is realistic in terms of emission reduction impacts.  If the US adopted all measures that are minimally economically plausible, the effect on global warming and climate would be marginal because the sources of emissions and increased atmospheric levels of CO2 are China, India, and developing nations that show no real inclination to reduce their use of coal or to accept lower levels of economic growth.

The alternative to taking a stand on principle and engaging in a constructive, realistic action agenda is to get rolled and rolled often.  The threat to the capitalist economic model is growing as evidenced by the percentage of people who believe socialism is preferable and by the support for the Green New Deal.  Proponents of the Green New Deal and similar programs must be challenged to show the cost of these programs, their effect on the economy, as well as on global warming.  That information would be sobering.

Past business strategies for confronting the climate orthodoxy have not worked. They have resulted in losing but losing gradually.  It is time to try a third way that is based on challenging climate advocates to join in a collaborative research and policy initiative.  They will most likely reject such an approach because they are winning. But that would demonstrate that they are more interested in scoring points than in developing cost-effective solutions.  That would put then on the defensive.

The Distortion of Rose Colored Glasses

 Some political scientists are postulating that authoritarian countries can offer their citizens high incomes by adopting or supporting private enterprise.  Since authoritarians have the power to get things done, authoritarian capitalism could cause democracy to lose its appeal.

Since World War II, the most economically successful countries have been democracies—mainly the US, Western Europe, Japan, Canada, and South Korea. Two political scientists, Roberto Fao, University of Melbourne, and Yascha Mounk, Johns Hopkins University, recently wrote that “sometime in the next five years, the total GDP of countries rated “ not free” …will surpass that of Western democracies.” They include in the “not free” Russia, China, Turkey, and Saudi Arabia. They believe that a growing number of countries are learning to combine autocratic rule with market oriented institutions.  To bolster their case, they point out that 60 years ago, western democracies accounted for two-thirds of global GDP while today it is one-third.  This is a non-sequitur.  It was western democracies and their capital investments that promoted the globalization that led to the wider distribution of global wealth.

Authoritarian capitalism is characterized by enforcing strict control by the state while the means of production is controlled by private owners  for their profit.  The benefits of capitalism come at the expense of personal freedom. There is an explicit partnership between government and big business and a willingness by the government to support capitalists at the expense of citizens and consumers.  China’s President Xi’s hostility to the private economy is evident by his state first philosophy and by favoring government connected enterprises.

There is no doubt that authoritarian governments can channel investments into favored industries and eliminate obstacles that could hinder their performance.  Turkey is a country that has gone through rapid industrialization that now has the world’s 17thlargest GDP.  And China has experienced double digit economic growth for the better part of three decades, at least that is what has been reported.  Authoritarian capitalist countries have out performed the US and other democratic capitalistic countries over the past decade and that has led to questions about the staying power of democratic capitalism.

But Turkey, China, and Russia are experiencing economic problems that raise questions about how well they can maintain private capitalism while repressing human rights and personal freedom.  While high rates of economic growth are the price of maintaining political power, political interference in economic decision making can lead to misallocation of resources because decision making is concentrated and not dispersed.  High rates of growth are also necessary to keep their populations sullen but not mutinous. The quality of life in these countries is not good.  In a mathematical quality of life calculation, the US was number 5 while Russia, China, and Turkey ranged from 73 to 81.  So, while the economic performance of these three authoritarian capitalist countries might seem impressive it comes at a very high price for their citizens.

The notion that authoritarian capitalism might replace democratic capitalism would turn on its head the belief that top down centralized economic direction will prove more lasting and superior to the benefits of dispersed economic decision making that characterizes democratic capitalism and its ability to respond quickly and accurately to consumer tastes and shifts in demand.  Freidrich Hayek’s Road to Serfdom made the convincing case of why democratic capitalism is superior.  

Democratic capitalism in the US is beset with a number of challenges which are giving socialism its recent appeal.  Some of our problems are the consequence of the influence of big companies on laws and regulations which distorts market forces and breeds crony capitalism.  The increasing power of Congress over how companies and industries act is what promotes crony capitalism and creates the view that the system is rigged.

The High Price of Staying Alive

In recent decades, medical science has madespectacular advances in treating life threatening diseases like cancer.  A growingpercentage of new chemotherapy treatments are now in the form of oral drugs, immunotherapy is being used more widely, and gene altering therapiesarebecoming ever more promising. Advances in other fields of medicine are just as spectacular.  But, and there always seems to be a but, these new treatments are incredibly expensive and getting more so.

Our ability to increase our knowledge about treating life threatening  diseases is outstripping our ability to make their costs reasonable.   This dilemma is ethically challenging as well as being a major public policy challenge. Some European countries use a cost-effectiveness standard to approve some very expensive cancer treatments. If a treatment costs hundreds of thousands of dollars but only adds a few months of life expectancy, it may not be approved.  As a society, we find this type of rationing abhorrent.  At the same time, we have not resolved how best to handle the high price of new life saving drugs which also are regressive and result in involuntary rationing.

Pharmaceutical companies probably come in for more criticism for high drug prices than they deserve.  Some price drivers are beyond their control.  Developing new drugs is expensive and some research suggests that only 1 in 10 new drugs prove safe and effective.  The cost of failures needs to be recovered or a company will go out of business.  The cost of drug development for companies that develop multiple cancer drugs can range from $2 to $5 billion per drug.

The largest cost in new drug development comes from regulatory requirements to prove a drug is safe and effective.  FDA requires preclinical testing and then three clinical trials before applying for approval.  This whole process can take 10 years.  After approval, a company has to monitor for side effects and conduct related tests.

Although there are a number of pharmaceutical companies, the only competition is in who can get to the market first with a FDA approved drug.  Once a drug is approved and under patent there is a legal monopoly.  Price is based on what the market will bear because there is no competition.  Manufacturers maintain a monopoly until their patents expire but too often generics are priced close to the patented drug price.  Again, no competition because usually only one firm is approved to  manufacture the generic.

Manufacturers give steep discounts—30% or more—to private purchasers like Sams, Pharmacy Benefit Managers (PBM) that administer prescription drug programs for employers, insurance companies and Medicare Part D, and hospitals.  With a lack of pricing transparency and poor communication, these drug providers can charge above competitive prices.  PBM’s for example, receive a share of the discounts they negotiate, so they have an incentive to keep list prices high. 

Since the price of these specialty drugs is less in many foreign countries than in the US, it is clear that lower prices can be achieved here.  

Since manufacturers are monopolies, they should be regulated as other monopolies are. The utility regulation model might be a useful approach. A body similar to State Corporation Commissions would approve prices charged and the rate of return that recognized risk and the need to recapture R&D expenses. Strong but reasonable returns would provide the incentive for continued investment.  

The cost of FDA approval is the major component in drug pricing.  But FDA is highly risk adverse. It doesn’t get blamed for the consequences of delays on bringing drugs to market but it does when a drug has unintended consequences.  Reducing red tape, streamlining the clinical trial process, modifying agency incentives would reduce approval costs.  In approving applications to produce generics, FDA should conduct a form of “dutch auction” where awards go to one or more firms that offer to charge the lowest retail price.

Insurance companies should be required to provide patients with information about the prices that a range of suppliers charge and explain better their formulary tiers and the rationale for drugs included in them.  Greater transparency about sources of supply and prices will engender greater competition.   The FTC should regularly review the vertical prescription drug structure to identify anti-competitive and anti-trust actions that are taking place.  Currently, each component in the supply chain has an incentive to keep prices high and to limit transparency.

Finally, barriers to drug importation should be reduced and Medicare/Medicaid should be allowed to negotiate prices like other sources do.

The insurance and drug lobbies are clear examples of Bootlegger and Baptist actions that result in poorer treatment for life threatening diseases.

A Rock and a Hard Place

The White House is pressing automakers to support its plan to freeze CAFÉstandards and roll back those promulgated by the Obama Administration which would have raised the CAFÉstandard to 54.5 mpg by 2025.  While on its face, auto manufacturer support would seem to be a no brainer but few things are as they appear on the surface.

The Administration is on firm ground in that the Obama regulations provided for a mid-course review of feasibility. Increasing the average miles per gallon to 54.5 is technologically feasible. Unless the mix shifts to compact, hybrid and electric categories, 54.5 mpg is an “aspiration”.  That would require a major change from what is taking place now with buyers moving to SUVs and pickups.  While CAFÉadvocates point to possible technology improvements in internal combustion engines, they down play the impact on the price of new vehicles. Estimates put the averageprice increase at $2000 per vehicle.

The biggest uncertainty is California which is threatening to sue if there is a roll back.  The odds of California prevailing against a Trump EPA are not great for two reasons.  First, CAFÉwas designed to reduce air pollutants; not greenhouse gases. Second, California has to apply for a waiver to set its own standards.  The effect on global warming if California prevailed in litigation is almost too small to measure even if the emission reductions of state that can opt-in to the California standards are included.  It fails any realistic cost-effectiveness test.

The problem for the manufacturers is that they prefer the rollback but can’t be sure that it will withstand judicial challenge given the Supreme Court’s decision on EPA’s ability to classify greenhouse gases as pollutants.  If the rule making is stayed pending judicial action, which no doubt will involve going all the way to the Supreme Court, there could be a new Administration before then and it would likely settle with California and re-establish stringent standards.  Being risk adverse keeps manufacturers from all out support.

If the Administration was not going forward with its E-15 ruling or if there was a chance of it being withdrawn, there might be stronger incentive for manufacturers’ support.  But that is not going to happen.  The Administration will not do anything to put Iowa at risk in 2020, so there is almost no possibility of not moving forward with the E-15n rule making. That is going to present auto manufacturers with a number of problems as most void warranties for vehicles using higher than E-10. 

The Rickety Bread Machine

In 1974, a group of students wrote The Incredible Bread Machinewhich was a rewrite of a 1966 book by Richard Grant that was a study of capitalism, freedom, and government interference. The 1974 rewrite promoted the ideas of personal and economic freedom.  One feature of both versions is a poem about a man who invents a machine that produces bread cheaply.  In time, he is punished by the government for being too successful.  Abundance leads to scarcity and starvation.

This book is relevant because the new progressives are intent in dismantling the bread machine—capitalism—and replacing it with “democratic socialism”. The name is intended to imply that private enterprise will continue to be the means of production but with some help and guidance from a beneficial government.

Make no mistake, those who embrace the Green New Deal—GND–want to take us down the road that has always produced misery for the many and affluence for the few. Those like Senator Warren, Bernie Sanders, or Alexandria Ocasia-Cortez may have noble motives but they are built on a foundation of illusion.  The government they want to create will not be run by angels who are motivated only by what’s right and best for the nation, it will be run by humans who pursue their own self-interest and respond to incentives that flow from laws and regulations that too often are influenced by those—crony capitalists– with the wealth and influence to shape them to their advantage.

Supporters of the Green New Deal have convinced themselves that the economy can be run better by the elites through centralized decision making than by the many dispersed parties that comprise our market economy. However, as Hoover Institution economist Thomas Sowell once observed, “the first law of economics is scarcity and the first law of politics is forget the first law of economics”.

It is obvious that a lot of people, especially in the media, have been seduced the GND promises of healthcare for all, free tuition, and miracle energy that has no externalities.  They have been aided and abetted by economists who promote Modern Monetary Theory in a way that makes GND proponents think that it is possible to turn on the money printing presses as a way to fund their fantasy promises easily and painlessly.

As Milton Friedman is known for observing, “there’s no such thing as a free lunch.” His work also showed that when government enables too many dollars to pursue too few goods, inflation is guaranteed.  There is no monetary trick to avoid that outcome.

Before the GND proponents and supporters do actual damage, they would do well to read Friedrich Hayek’s The Road to Serfdom.  The advocates of the GND contend that it is aspirational but Hayek demonstrates that the means by which ideals are achieved means the “abolition of private enterprise, of private ownership of the means of production, and the creation of a system of “planned economy” in which the entrepreneur working for profit is replaced by a central planning body.”  He wrote this in 1944.

The bread machine is in need of repair; not dismantling.

“Bring It On Mitch”

I normally don’t post more than one blog weekly but am making an exception this week because of the smug response of some democrats to Senator McConnell’s plan to hold a vote on the Green New Deal.

Senator Durbin, on Morning Joe this morning, took pleasure in saying that he hopes that Senator McConnell brings up the Green New Deal for a vote so that he can ask him if he believes that human activities cause global warming.  Apparently, Senator Durbin like most climate advocates believe that republicans and skeptics are knuckle dragging troglodyte deniers.

Senator McConnel could begin his response by stating that climate change is real, that CO2 contributes to warming, and that human activities contribute to global warming.  He could then ask the senator if he can point to the science, not models and assumptions, that demonstrates that humans are mainly responsible for warming over the past 6 or so decades?  He can also ask if the science on climate is settled, why does the IPCC estimate of climate sensitivity vary by a factor of three. Since the warming response to increasing is not linear, he could ask where on the warming curve is the world?

In discussing the Green New Deal (GND), republicans could ask its democrat supporters the following:

  • If ask Alexandra Ocasio-Cortez contends we have only a little more than a decade to avoid disaster, how are we going to get China, India, developing nations to abandon coal?
  • With 268 million registered vehicles in the US and a turnover rate of about 15 years, how are proponents going to get them off the road and what will they replace them with?
  • If trains are to replace airplanes, how will citizens get to Hawaii or Europe?
  • Since Bill Gates has criticized wind and solar energy as being unreliable, what will replace the current electrical enerating system?
  • If wind and solar are the answer, what is source of storage when the wind doesn’t blow and the sun doesn’t shine?
  • Where does the money come from to all of these things so quickly when it has been estimated that just replacing electrical power generating could cost $15 trillion?

Although Senate floor debates are more about political theater than actual debates, the back and forth on the Green New Deal might turn out to be an educational experience about some important realities about climate change and how they should shape policy responses.

Wink and Nod Tax Policy

Although the proposals for a special tax on the very wealthy by Alexandria Ocasio- Cortez (AOC) and Elizabeth Warren has received a lot of criticism, it also has gained a lot of support.  Like the dumb farmer that doesn’t learn from experience or adapt to agricultural conditions, these proposals assume that the very wealthy are dumb and won’t adapt to changes in tax law.

The super wealthy like Warren Buffett and Bill Gates have helped give these confiscatory tax proposals life by claiming that they are under taxed.  Bill Gates says, “I need to pay higher taxes” and Warren Buffett joined him by saying “I don’t need a tax cut.”  They are not alone, founded in 2010, a group named Patriotic Millionaires also advocates higher taxes on the wealthy.   According to an article in The Atlantic–pay more—a survey by US Trust found that 48 % of those with several million dollars in assets are willing to pay more taxes for the common good.  There is no doubt there is a a survey that also shows that Venezuelans love Maduro.

Implicit in the US Trust survey and the views of the very wealthy like Gates and Buffett is the belief that the Federal Government can spend their money more efficiently and wisely than they can.  That is a triumph of hope over experience.  But this implied belief is contradicted by those like Gates who have set up foundations for philanthropic objectives as a way to spend their wealth before the government gets its hands on it.

What is driving these wealthy individuals to act against their self interest?  One explanation is fairness. The super wealthy have to believe that they benefit disproportionately from tax cuts.  They also seem to believe that lost federal revenue means higher deficits and a growing debt.  Neither explanation passes the red-face test.  The Tax Foundation reports show that the tax system is already very progressive.  Forty four percent of tax filers pay no federal income tax while the top 1% pays 37.3% and the top 10% pays 69 %.  The tax rate for the top 1% is 26.9 % which is 7 times higher than the percentage paid by the bottom 50%.  To make the point more compelling, a CATO Institute analysis that “the Top 400 paid $29.4 billion in federal income taxes in 2014, an average of $74 million each.” This represents 2.13% of all taxes paid.  While that might seem like a small percentage, in it represents 70% of the taxes paid by the bottom 50% in 2016, the latest year available.

As for the notion that paying higher taxes will help with reducing the deficit and debt, the proponents of higher taxes on the wealthy have made clear that they want more revenue for increased spending; not fiscal responsibility.

The wealthy who say they want to pay more taxes know these facts. So, there must be some other reason especially since Bill Gates and Warren Buffett have pledged to give away half of their wealth and have recruited a number of others to do like wise.  As of last year, 183 people or couples had signed onto Bill Gates’ Giving pledge which involves a commitment “to dedicate the majority of their wealth to giving back.”

A more compelling reason may be the GroupThink effect of being viewed socially responsible by the public and their social network.  In fact, those who have created philanthropic foundations to give away the majority of their wealth are showing the shallowness of their support higher tax rates by giving away money for which they have received tax deductions that resulted in lower taxes.

People like Bill Gates and Warren Buffett, and perhaps most of the super wealthy, derive most of their income from capital gains which makes it easier to advocate higher incometax rates.  They know that the effect will be small and would encourage those subject to it to search for other ways to shelter income.  At some point, the AOCs and progressive presidential candidates will turn to raising the capital gains tax as a way of increasing taxes on the very wealty.  That will make for much political theater but won’t produce much in the way of income or economic benefit.

Increasing the capital gains tax rate would be counter productive in that it would provide an incentive to hold capital assets longer thus delaying when the government would get tax revenue.  Economists call this the locked in effect which means that more profitable investments can’t be pursued.  Further, economic research has shown that lower not higher capital gains rates increases economic growth.  While the case is made that lower capital gains rates encourage more sheltering because of the larger difference between capital gains and regular income rates, the evidence supports the economic case for a low rate because it increases capital investment and new business formation. 

At least some of the politicians advocating for these taxes understand behavioral economics and the tax policy effects because they are already wealthy and know how to protect their wealth.   Wink and nod policy proposals make for grand illusions and great politics but they are lousy and dangerous economics.  What people like Warren, AOC, and the other progressives running for president are really doing is using one of Saul Alinsky’s Rules for Radicals–Pick the target, freeze it, personalize it, and polarize it—to demonize the wealthy for their own political gain.  Class warfare has unintended consequences.

Oops Journalism

The coverage of the Covington HS incident during this year’s March for Life may have shown journalism at its worse. Depending on your personal bias, you could find a version of the event to confirm it.  

In this age of 24/7 news and instantaneous coverage of events, journalists and the media that employs them have incentives to be first with a piece of news.  If they get it wrong, many don’t engage in introspection; they simply move on. Partly this is a result of two conflicting definitions of what constitutes journalism–writing characterized by a direct presentation of facts or description of events without an attempt at interpretation and writing designed to appeal to current popular taste or public interest.  The second definition, which seems to be the one followed today, has no emphasis on facts without attempted interpretation.  Interpretation moves an article from reporting to opinion without admitting it.

The pejorative, Fake News, is not new but today, more journalists appear to follow Mark Twain’s counsel; “get your facts first, then you can distort them as you please.”  That this is taking place so frequently can be attributed to the 24/7 news cycle and the explosion of sources of media.  Seventy years ago, George Orwell wrote 1984.  Almost 60 years ago, Daniel Boorstin, historian and former Librarian of the Library of Congress, wrote The Image:  A Guide to Pseudo Events in America.  One insightful observation by Boorstin was “By harboring …and enlarging our extravagant expectations, we create the demand for the illusions with which we deceive ourselves.  And which we pay other to make to deceive us.”  This was not a new finding.  Boorstin points out that P.T. “Barnum’s great discovery was not how easy it was to deceive the public, but rather, how much he public enjoyed being deceived.”

Unfortunately, Boorstin offers no quick fix.  “There is no formula for mass disenchantment. … Each of us must disenchant himself, must moderate his expectations, must prepare himself to receive messages coming in from the outside.”

The lessons that not only journalists should take from the Covington incident and similar ones is one that I learned from a former colleague, Phil Goulding, who wrote a book—Confirm or Denyafter his tenure as Assistant Secretary of Defense for Public Affairs.  That lesson is “first reports are always wrong-or so often wrong that they always must be considered suspect.”  He amended that later to say third reports should be taken with a grain of salt.  At least that is my recollection.The volume of what is described as news is so great and comes at us so rapidly that all of us would be better served by starting with the view 

Free is Expensive

In 2010 President Obama gave us the Affordable Care Act which it isn’t.  Republicans pledged to repeal and replace, which they didn’t.  Now, progressive democrat candidates for president are promising healthcare or Medicare for all.  

Milton Friedman once said something like if you want to know how expensive something is, make it free.  The Brookings Institute and the Mercatus Center have estimated that healthcare for all would cost over $32 trillion dollars in its first decade.  While in theory it would reduce healthcare costs by $22 trillion, the net effect remains a $1 trillion a year increase in the growing deficit and debt.

Healthcare in the United States is a mess and various attempts to “fix it” have only made it worse.  If Congress and a President ever get serious about improving the delivery of healthcare and reducing its cost, they first have to understand its many problems.  Tinkering doesn’t work.

Advocates for change often refer to systems in European countries like the Netherlands, Norway, and Switzerland.  While there are elements of those programs that might be appropriate here, they can’t be adopted in a wholesale fashion.  But US healthcare does not compare well with countries like Sweden, Norway, or Switzerland in terms of cost and quality. So, they are worth taking into account.

What’s the answer for us?  It begins with recognizing that we don’t have insurance as it is understood; nor do market forces come into play.  Employer provided health care along with government provided subsidies for Medicare and Medicaid have blunted normal market incentives. In the case of employer provided “health insurance”, wage controls during World War II led employers to provide medical coverage as a benefit to get around those controls.  Much of our health insurance involves third party payers, meaning consumers have low or no incentives to control costs. In addition, the market is balkanized and bureaucratically controlled resulting in no real competition.

Here are some suggestions for consideration.

Employer provided health coverage should no longer be tax deductible.  Employees who receive employer provided insurance should be taxed on its value or alternatively could receive the cash equivalent of that insurance.  Instead of providing insurance, employers should be encouraged collaborate in forming non-profit exchanges which would provide insurance companies incentives to compete for a large pool of employees’ business.  With a reformed health insurance market, employees would have more options to choose from.  Insurance companies should be allowed to sell across state lines to increase competition and provide employees the widest range of insurance options.

The government should draw on the Swiss model which produces good outcomes at a national cost well below ours.  The Swiss mandate that all citizens purchase insurance from private insurance companies, establishes a minimum package of benefits, and mandate coverage of preexisting conditions.  Those provisions are similar to ones in the Affordable Care Act.  Republicans hate those features but there are strong reasons for them.

Medicaid should be reformed along the lines of the Swiss model to subsidize premiums for lower-income people to keep their costs less than 10 percent of their incomes.  The subsidy should cover 100% of the premiums for the unemployable and permanently disabled. As a rich nation, we should take care of those who can’t take care of themselves.

The Swiss model also has other features worth adopting.  The Swiss require insurance companies to offer minimal policies on a nonprofit basis. They are based on relatively high out-of-pocket expenses to encourage consumers to spend wisely.  The Swiss also mandate that prices be made public, which helps consumer markets function efficiently.

To avoid adverse selection by those with pre-existing conditions, states should establish high risk pools similar to pools for uninsured motorists.  And like auto policies, there would be a fee as part of health insurance premiums to fund the high risk pools.

The reform of the health insurance market must also include Medicare reform.  Medicare spends much more money than it takes in and as a result is one of the drivers of the growing deficit and debt.

To change that, the age for eligibility should be increased in line with increases in life expectancy.  Also, the cap on social security and medicare taxes should be raised and benefits means testing levels should be raised.  There have been a number of proposals for making Medicare more efficient and for doing a better job of lowering costs.  Those need to be pursued aggressively instead of just gathering dust.