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By George P. Brockway, originally published December 29, 1987

1987-12-30 Medical Care and Pauperization Title

HAVING recently seen the insides of more hospitals than I wanted, and having accordingly had bills from more medical specialists than I dreamed existed, I have a more intimate awareness of the Medigap than I had when I wrote my April 20 column on the subject. Hence these reflections on three related problems.

First, I have an unhappy impression that some of the specialists were unnecessary, and that some of the things the necessary ones charged for were unnecessary. A couple seemed to drop around for two or three minutes of bed side chitchat long after the diagnosis had been made and their specialty’s noninvolvement confirmed.

One of the latter, a nice fellow with an impressive beard, sent me a bill for 12 such visits at $65 a pop. Medicare will ultimately pay somewhat less than one-half of that, and a group policy I have will probably pick up 80 per cent of the balance; so I’m not hurting too badly. But every medical expense, whether legitimate or not, goes to swell the national medical bill and thus the medical insurance bill. Medicare then raises its rates or reduces its benefits, and the private insurers do the same.

Now, my impression that this fellow with the beard was riding the gravy train is only an impression. I don’t know, and I have no satisfactory way of finding out. Besides, when I’m a patient I want to have everything possible going for me. So I’m not going to inquire whether bills are padded, and I’m not going to shop around (as the Reagan Administration thinks I should) to get the cheapest rates.

You might think my GP blameworthy for sending in all those specialists. Yet put yourself in his shoes. Suppose he doesn’t call in all the specialists and suppose they don’t order all the blood tests and X-rays and CAT scans and MRIs. Then suppose I wind up with a serious ailment that might have been avoided. As I keep telling you, I’m a mild-mannered man and I’d probably not sue, but plenty of others would. So to guard against a malpractice suit, the GP orders every specialist in sight. Of course, peer review might be able to do something about this problem, and for all I know it does; but I’m sure it’s not easy.

Insurance companies keep trying to get legislatures to limit the amount of damages that can be collected, or to outlaw claims for pain and suffering. This seems to me an unreasonable solution. Malpractice does occur, and accidents do occur. Should I lose the use of my right hand because of an incompetent or accidental slip of a surgeon’s knife, I’d not be “made whole,” as the lawyers say, by a free night in the hospital (less legal fees). If the doctors can’t afford high malpractice premiums, and the insurance companies can’t afford to lower them, I can’t see any course short of turning the whole thing over to the government. As Charles O. Gregory argued in a wise and witty book entitled Torts and Retorts, all sorts of personal injury claims (torts) should be the responsibility of the State.

A leading theme in the history of Western law has been the gradual transfer to the State of rights and duties that in more primitive civilizations were private. In ancient Greece, triremes were built not at State expense but at the expense of rich men chosen by lot for the honor. In late medieval Italy, all families of any consequence maintained private militia, like the followers of the Montagues and the Capulets, and competed in building lofty military towers that would enable them to overawe their neighbors. San Gimignano, a town of no great size, had 70 such towers, 14 of which still stand. (A civilizing step was the passage of a municipal law-a zoning ordinance- prohibiting towers beyond a certain height.) For centuries, the detection and punishment of crime was solely the obligation of the injured. Fairly late, the impersonal judgment of God was rendered via trial by battle and trial by ordeal. Secular public enforcement of criminal law is a relatively new idea.

In the same way, health care is gradually shifting its ground. The notion of fee for service is already being compromised by the movement to shame doctors into accepting approved fees. It’s not too much to hope that we may eventually have the sense to adopt the better European systems.

A step in this direction has been taken by Massachusetts. Cynics say it is a calculated maneuver in Governor Michael S. Dukakis‘ play for the Democratic Presidential nomination. Giving the Duke the benefit of the doubt, I still think his scheme is an example of what Samuel Johnson said about good intentions and the road to hell.

There are close to 6 million residents of Massachusetts and almost 700,000 of them have no health insurance. I must admit I’m astonished that so few are not covered. About two-thirds of the uninsured are employed or are dependents of people who are employed. The Governor proposes to narrow the gap by requiring all employers to insure their employees, with the state picking up the relatively small balance. Clearly what makes the scheme attractive is Massachusetts’ present unemployment rate, said to be less than 2 per cent, since the drain on the Commonwealth fisc won’t require dramatically higher taxes. Before the days of high-tech, when Massachusetts’ unemployment rate was one of the highest in the country, the scheme wouldn’t have seemed so painless.

That brings us to the second problem. Whatever the condition of business, universal employer-financed health insurance has a damping effect on employment. Once additional employees cost you several hundred dollars apiece beyond their pay, you’re not so cavalier about hiring them. (Social Security taxes, right now, work to discourage employers in this way; they’re also heavily regressive on employees.)

Just because we’ve stumbled along this half century with a far from perfect Social Security system doesn’t mean that more of the same won’t hurt us. In The Next Left Michael Harrington argues persuasively that piling payroll taxes on payroll taxes was largely responsible for the high unemployment that contributed to the failure of Socialist President Francois Mitterrand‘s program in France. It could happen here.

Aside from Workmen’s Compensation, medical insurance has no special connection with employment. In a more civilized nation, all such protection would be a national responsibility, met out of the general revenue without the intervention of insurance companies, private or public. The tax bill might then seem higher, but the drain on the common wealth would be very much less, and the salutary effect on the general welfare would be very much greater.

For this reason I’m not passionately interested in HR 2470, the bill the House has passed limiting some catastrophic medical expenses to $2,000 a year. And speaking personally, although our medical bills will be many times $2,000 this year, HR 2470 will not, as I understand it, benefit us in the slightest. The insurance company that wrote the group policy I’ve mentioned will get all the benefit, and we will have to pay maybe $1,160 a year in increased Medicare premiums. The insurance companies that will be hit are the TV bandits I described here last April-if their bemused subscribers have the sense to drop them as utterly useless as well as scandalously expensive.

Those committed to laissez-faire insurance complain that HR 2470 provides for a sliding scale of premiums. Since this tops out at an Adjusted Gross Income of $14,166, my objection is not that it is progressive, but that it is not progressive enough. It is not reasonable for anyone with an AGI of$14,166 to be put in the same class with David Rockefeller, or even with me.

THE THIRD medical problem is the hundreds of thousands soon to be tens of millions- of senior citizens who can no longer take care of themselves. In the good old days, before there were such things as senior citizens, the old folks moved in with the young folks, or possibly had a spinster daughter move in with them. In either case, the elders were able to give their adult offspring the benefit of their long accumulated wisdom, driving the offspring to spring up the wall. In many a home, something approaching The Tragedy of King Lear was re-enacted. Yet both generations took some comfort in the fact that the elders were not a public charge. Where, for lack of family support, they were the public poor house took over.

All this has changed, for reasons we’re all familiar with: Family ties are looser today; individual pride is stronger; the expected life span is very much longer; bottom-line-conscious employers are quick to replace high-priced and slowed down old hands with eager beginners; and medical research has rendered many diseases incapacitating rather than killing.

These changes lead to the matter of nursing homes and how to pay for them. They are not paid for by Medicare or by most commercial health insurance. They are paid for by Medicaid, but only at the expense of near-pauperization. The rules are complicated, and complicated revisions are daily suggested; yet it remains at best a disheartening and dishonoring process, especially for the middle class that has worked hard for independence. What’s to do about it?

Actually a simple solution suggests itself. Instead of forcing pauperization before entry into a nursing home, apply the force at the end. That is, if it is reasonable for the government to exact as full payment as possible for nursing home care, let it do so from the patients’ estates after death, not from their reserves.

They would thus be able to retain the hope, however slim, of being able one day to take care of themselves again, outside the confines of the nursing home. Moreover, they would be spared the shame of pauperizing both themselves and their spouses, or the alternative heart-wrench of unwanted divorce in order to protect the independence of the non-institutionalized partner.

Obviously it would be difficult to devise regulations that would forestall the temptation to diddle the government in one way or another. But the same difficulty obtains under the present system. Obviously, too, it would cost the government something to have to wait for its money. On the other hand, the money, when the government finally got it, would tend to be greater, for there would be no need for most of the exceptions that now limit Medicaid’s claim on a patient’s means.

Finally, some will object that my plan would deprive offspring of their rightful inheritance. To them I reply: (1) The heirs of patients pauperized as a condition of Medicaid inherit little or nothing as it is; and (2) I’m not one to do battle for the right of inheritance, anyhow. In fact, I join economists as various as Hayek and Keynes in thinking the right might well be abolished. But that is another question.

The New Leader

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By George P. Brockway, originally published November 30, 1987

1987-11-29 Bursting the Supply-Side Bubble Title

1987-11-29 Bursting the Supply-Side Bubble Wall Street

ONE LISTENS with astonishment to the explanations of the Great Crash of 1987. With unprecedented unanimity, pundits and brokers and bankers and public officials call the budget deficit and the foreign trade deficit to blame.

In his post-crash press conference, President Reagan seemed not to understand. He was being pushed into what the press called a summit conference with Congressional leaders to see about reducing the budget deficit, but his heart plainly wasn’t in it. Look, he protested, the budget has been Gramm-Rudmaning down and will go down some more, even without a conference. He couldn’t see what is so bad about that trend, although he was ready to blame the Democrats for anything anyone happened to think bad about it.

It’s not hard to share the President’s bewilderment. If the budget deficit is a problem, it is in fact being reduced. A few hardliners may be upset that the reductions are not greater and faster; yet most people (including Ronald Reagan) have absorbed enough from Keynes (whom the President gracelessly and ignorantly disparaged) to know that doing too much too fast with the deficit would be a pretty sure prescription for a recession. Keynes himself might well have thought the reductions an utter mistake at this time. But he is dead (as we all are in the long run), and what is actually being done is what the pundits say Wall Street wants. If Wall Street is really upset by the deficit, it should have broken two years ago, when the deficit was higher, or five years ago, when the deficits (and the market itself) started their dramatic climb.

No, the deficit story is a fairy tale. It is implausible on its face, and its implausibility can readily be tested. We had a pretty good market crash in 1929. What happened then? Well, one thing is sure: The 1929 crash wasn’t caused by a budget deficit, for the budget was in surplus that year to the tune of $700 million, which was a lot of money back then. Either the crashes of 1929 and 1987 are totally different breeds of animal, or deficits had nothing to do with either of them.

The two crashes did, without question, have one thing in common. Both were preceded by prolonged and steep run-ups of the stock markets. That in itself is no surprise, since you have to have attained a certain height to be able to make an attention-getting fall. But what it signifies is that both climbs were speculative: Business didn’t improve all that much. Though in both years all persons of prominence assured us that the economy was fundamentally sound (there seem to be no other words to express this meaningless thought), in neither year was there a justification for the heights the market reached.

Speculation, however, doesn’t need a justification; it merely needs an occasion. The necessary occasion is a very simple one: Some people have to have more money than they know what to do with.  Literally.

We have been satisfying this requirement. As the recently announced figures from the Census Bureau show, the number of people with large incomes has increased in the decade and a half from Richard M. Nixon through Ronald Reagan. The top 20 per cent of American families had an average income of $126,415 last year and together engrossed 46.1 per cent of all personal income. More important, they have improved and are improving their position at the expense of the middle class and the poor.

Now, it is practically impossible to spend a million a year on living well (although some 57 professional baseball players are having a go at it), and it is perfectly possible to be pretty comfortable, even in a high-priced city like New York, on as little as a hundred thousand. You can, of course, spend pots of money collecting lead soldiers or used postage stamps or post impressionist masters. The trouble with such collections is that, even at a moderate rate of inflation, they increase in value very rapidly and so add to rather than deplete your wealth. So lots of people-and not merely ball players have lots of money.

The supply-side theory, to which the President pledged continued devotion the other night, contemplates that the rich, thwarted in their struggle to consume their income, will invest it. But when 20 per cent or more of the economy’s productive capacity is lying unused, the possibilities of prudent new investment are severely limited. What to do? Nothing for it but to take a flyer in the market. At the same time, the rich of the rest of the world have the same problem-and the same solution. Add to all this the mutual funds, the pension plans, the educational and charitable endowments, the insurance reserves, and the unabashed speculations, and you have a lot of money chasing a limited number of shares of stock.

Ingenious men have worked very hard to increase the number and kinds of paper to buy and sell. Two ways have especially recommended themselves: the development of the stock futures markets, and the computerization of Wall Street. The first created new products (as the brokers call them) out of nothing but the eagerness to speculate; the second, by enabling an increased velocity of trading, increased the opportunities to speculate, just as an increase in the velocity of money in effect increases the money supply.

There was also a partially contrary movement. Takeovers and buyouts, which generally substituted debt for equity, reduced the number of shares of some stocks available for speculation while simultaneously greatly enhancing the taste for speculating.

THE MOST elementary fact about a bull market is that it absolutely and unceasingly depends on sucking more money into it. If there are 100 shares of stock, and $100 available for investment, the price of each share will fluctuate narrowly around a dollar, no matter what incantations are uttered by market analysts and government officials. If the number of available shares is reduced, or the number of available dollars increased, the price will rise proportionately. But all who anticipate a further increase in available funds will become more eager in their bids, in the expectation of quickly and profitably selling what they buy to the holders of the new money. Thus Holland’s Tulipmania was sustained, and thus the Great Bull Market of the ’20s, and thus the Reagan-Thatcher-Nakasone market that has now crashed.

Because one way or another the number of pieces of paper to speculate in has greatly increased, the number of dollars to sustain the recent bull market had to be increased still more, and this has been done in two ways: the shift of trust and endowment funds out of the bond market and into the stock market, and the supply-side tax cuts for the wealthy. The former was substantially effected a couple of years ago, and the latter has gone about as far as it can go with the new tax law’s reduction of the top rate to 28 per cent. There is still a fantastic amount of money around, but it is no longer being increased rapidly. The kissing had to stop.

The trade deficit is said to have joined with the budget deficit in scaring foreigners out of our market. This explanation of the crash overlooks what is ordinarily insisted on: the global interdependence of financial markets. It wasn’t Wall Street alone that laid an egg. Eggs were laid in Tokyo and Hong Kong and Sydney and London before the New York market opened on Black Monday. You might say that all over the world bull markets that had known no boundaries were suddenly fenced in.

Just as the reason for the crash is grievously misunderstood, the policies proposed for dealing with it are grievously misconceived. Since what happened was caused by a large number of people having more money than they knew what to do with, it follows that it is counterproductive to resist taxing some of that money and applying it to public purposes, not excluding deficit reduction. The supply-side tax cuts were a disaster. Since the wealthy couldn’t find enough new productive investments for their surplus funds, it follows that there hasn’t been enough effectual demand (as Adam Smith would have said) to keep our existing productive capacity busy; so the enthusiasm devoted to union busting, entitlement shaving, welfare restricting, and real-wage reducing-all of which reduce effectual demand-has been disastrously misdirected.

Our pundits seem able to behold the mote in German and Japanese eyes but not to consider the beam that is in ours. If the world economy would be strengthened by increased consumption in those lands (and it would), it can scarcely make sense to decrease consumption in ours. Over the past 15 years the income share of the poorest 20 per cent of our families- those who have to spend their incomes-has fallen 10.8 per cent. An economy that reduces its aggregate demand in that way-and seems determined to do more-is not fundamentally sound.

The New Leader

By George P. Brockway, originally published November 2, 1987

1987-11-2 The Golden Mean Title

1987-11-2 The Golden Mean Wilfredo Pareto

 

 

 

 

 

 

 

 

 

 

THE CENSUS BUREAU has finally released its estimates of the 1986 median family income, the numbers of people living in poverty, and the distribution of income among the rich, the poor and the middle class. The news is not the figures: They merely confirm the impression everyone has had. Rather, it is the Bureau’s acknowledging for the first time that “there has been an increase in inequality in the United States during the last decade and a half”-or from Richard M. Nixon through Ronald Reagan.

It is by no means easy to know how to go about measuring inequality. Lars Osberg has written a solid 300-page book on the subject, Economic Inequality in the United States, that is a good place to begin if you want to understand the complications. For my part, I share Disraeli‘s view that there are “lies, damned lies, and statistics.” So I’ll take what the Census Bureau says on trust (or distrust) and simply note that its figures assume the rich, the middle and the poor are fixed percentages of the population, instead of classes with definable characteristics to which variable numbers of people belong. On this basis we always have the three groups with us, and in the same proportions.

Putting to one side the probability that if you want to understand how the economy distributes its benefits wealth[1] is a better index than income[2], I suggest that the customary method of presenting the statistics understates the shocking and dysfunctional economic inequality in the United States. It is bad enough that from 1970 to 1986, as the Census Bureau reports it, the richest fifth of American families increased its share of the national income from 43.3 per cent to 46.1 per cent, while the poorest fifth saw its share decline from 4.1 per cent to 3.8 per cent, and the share of the middle three fifths dropped from 52.7 per cent to 50.2 per cent. My guess is that figures for the same years showing how many families had incomes over, say $500,000 (in constant dollars) and under $10,000 would give a better idea of our increasingly polarized income distribution.

That shifts in distribution are occurring at all has a bearing on a long-running debate in economic theory. A typical statement of one side of the debate is Pareto’s Law, promulgated by Vilfredo Pareto in 1896, and not to be confused with his fashionable but fuzzy notion that goes by the clumsy name of Pareto Optimality. In an impressive array of societies, Pareto estimated as best he could, given the practical nonexistence of reliable data, the arithmetical mean of incomes. These means did not come in the center, as they would have if the distribution followed a standard bell curve. Furthermore, the curve on the high side of a mean was radically different from that on the low side, because there was no top limit to possible income, but everyone below a bottom limit died of starvation, reducing the curve to a straight line at that point.

Pareto’s supposed law is frequently misrepresented to assert that no change is possible in income distribution. Actually, he allowed that change did occur on the low side of the mean. It was, after all, obvious that fewer people starved to death in 19th-century Europe than had done so previously. What happened on the low side of the mean didn’t interest him, though. He was fascinated by the consistent pattern he claimed to see on the high side and by the conclusion he drew from it, namely that progress for the lower orders depended on progress for the top. Efforts at redistribution, in his view, were doomed to failure and could only make it worse for everyone.

Unlike more naive knee-jerk conservatives, Pareto did not claim that the same people would invariably be on the high side. He hoped there would be a lot of movement up and down, in the expectation that this would permit Darwinian laws (which he obviously misunderstood) to improve the species.  Nevertheless, his alleged law provides alleged justification for the trickle-down theory of political economy.

Pareto himself recognized, at least in principle, that his law was only empirical. It depended on the facts he so laboriously collected and was inevitably at the mercy of contradictory facts, such as those just released by the Census Bureau. Empirical observations are elevated to the status of laws only if reasoned explanations can be adduced for them. In the present instance, maldistribution of talent or effort has been proposed as the explanation for the maldistribution of economic rewards: If you’re so smart, how come you’re not rich? But the sole evidence for the distribution of talent or effort is the distribution of rewards. The argument chases its tail.

If there is no natural law of income distribution, then human policies can have an impact, and it is no longer rational to argue that prosperity depends on making the rich richer. Indeed, it becomes steadily clearer that a more egalitarian distribution of income would produce greater prosperity. The issue, however, is usually posed in terms of psychological incentives. The economy springs ahead, we are told, because certain people are good at getting things done, and these people need financial incentives.

This has never been good psychology. On the one hand, the real can-do guys, like a Marine lieutenant colonel we have recently heard of, are must-do guys. They get their kicks from doing, not from accumulating, and the problem is to calm them down, not stir them up. On the other hand, you have to use either a carrot or a stick to get most people to do the humdrum jobs and the unpleasant jobs-that is to say, most of the jobs. Carrots are obviously more humane than sticks (I like carrots). Any economy or any company that beats its people with sticks is to that extent inhumane. It demeans itself.

There is also a less pressing reason for a more egalitarian distribution. Keynes wrote a great book to elucidate it. A prosperous economy depends on the society’s propensity to consume, and the propensity to consume depends on the ability to consume, which depends on the ability to pay the bills. “Experience suggests,” Keynes said, “that in existing conditions saving by institutions and through sinking funds is more than adequate, and that measures for the redistribution of incomes in a way likely to raise the propensity to consume may prove positively favorable to the growth of capital.”

THE CENSUS BUREAU figures show that we are going in the opposite direction, and they are ominous from the point of view of our society as well as from that of our economy. “Wealth,” Plato wrote in The Republic, “is the parent of luxury and indolence, and poverty of meanness and viciousness, and both of discontent.” Aristotle saw that “those who have too much of the goods of fortune … are neither willing nor able to submit to authority …. On the other hand, the very poor … are too degraded…. Thus arises a polis, not of freemen, but of masters and slaves.” These observations are obvious enough. Surprisingly, it remained for Rousseau to give the argument a subtle shift: “It is on the middle class alone that the whole force of the laws is exerted; the laws are equally powerless against the treasures of the rich and the penury of the poor.”

In any stable society the middle class is, for all practical purposes, the society. The middle class feels the force of the laws because it has a stake in the laws in things as they are, or at least in the direction things are taking. The upper class feels itself exclusive, the lower class excluded; they are at best indifferent, at worst hostile.

Since super-rich individuals and infra-poor individuals can be law abiding, social class as understood by Rousseau and me is not quite the same as economic class. Yet the two kinds, though they are not congruent, do very much converge; consequently, what the Census Bureau sees happening to what it calls the middle class (the middle 60 per cent of the population) is worth attending to.

The American middle class is slipping economically. Moreover, it is likely that many of the 38.2 million families so classified might more accurately be grouped among the working poor. The average income of those above the middle 60 per cent is $126,415 that of those below is $10,142 (or lower than the official poverty level of $11,203). These figures are a long way from fully disclosing the range of incomes, but they do suggest fertile fields for alienation at both extremes. What can happen here-what is happening here-is not alienation in the sense of allegiance to a foreign power, but alienation in the sense of no allegiance whatever.

To allege that President Reagan has consciously aimed at the erosion of the middle class would be easy, but it would be wrong. The conscious aim has been to make the rich richer on the Paretan theory that the rest of the economy will be dragged upward, too. I hasten to protest that I’m not suggesting the President ever heard of Pareto, let alone read him; it’s just a case of great minds running in the same channel. And not only Reagan’s mind, but Margaret Thatcher‘s and Jacques Chirac‘s and Helmut Kohl‘s, and Yasuhiro Nakasone‘s, and those of most of the leaders of the Third World and of most of the people running the IMF, not to mention every investment banker you ever heard declaiming about the bankruptcy of Social Security.   We are faced with something more than an aberration of American politics.

Even if the Democrats manage to avoid self-destruction, and even if they manage to awake, like Rip Van Winkle, from their 20-years dream of middle-of- the-roadism, they will still have to struggle to protect our society from the conservative crazies of the rest of the world. For regardless of what we do at home, these crazies will continue to enrich their rich, who will continue to want to speculate on our markets, which will again suck up and ultimately destroy whatever surpluses we create.

The New Leader


[1]  the abundance of valuable resources or material possessions

[2] for households and individuals, “income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings received… in a given period of time.”[2]

By George P. Brockway, originally published October  5, 1987

1987-10-5 Of Deficits and Taxes Title

ANOTHER BUDGET deadline has come and gone and that old devil deficit is still there. What can we do about it? First, we had better consider briefly what would happen if Gramm-Rudman- Hollings were successful in getting the annual deficit down to zero. For we’d have a crashing depression, that’s what would happen. Whether the miracle were achieved by reducing military expenditures or by cutting off the poor or by raising taxes or by all three, somehow $160 billion (more or less) would be abstracted from the economy.

Actually, “abstracted” is the wrong word. The $160 billion would not be taken from the spendthrift government and put in your thrifty pocket to be used in a more propitious time. No, all that lovely money would not exist. Moreover, the possibility of its existence would be gone forever, and with it the goods and services the money might have bought, plus the goods and services that might have been bought by those who would have earned money by producing the first lot, and so on ad infinitum. R.F. Kahn‘s multiplier works both ways.

Or look at it this way: One hundred and sixty billion dollars is about 4 per cent of our gross national product. The average fall in GNP for depressions since World War I has been about 6 per cent. The possibility is more ominous when you consider the unemployment rate. In 1929, the rate was 3.2 per cent. Today, it is officially stated to be 5.9 per cent-and this counts part timers as fully employed, and doesn’t count at all those who are too discouraged to look for work. In other words, we have a head start on any depression we decide to bring about.

Mention of unemployment reminds us of the real point: The vice of depression is not the loss of potential goods and services but the loss of jobs and self-respect. No one can spend much time in the labyrinths of a shopping mall without concluding that we already have more goods and (perhaps) services than we-literally-know what to do with. Our basest beggars are in the poorest thing superfluous. Personal dignity and self-respect depend on the right to contribute to the common wealth. Even without a depression too many of us are denied that right. We are all demeaned by that denial.

Does this mean we are doomed to run deficits forever? Won’t all that debt bring double-digit inflation back again? And isn’t it irresponsible to pass on to our children the consequences of our fecklessness?

When you look at the record, you wonder how these staples of campaign oratory and editorial punditry get taken seriously. In 1980, the deficit was $73.8 billion (or 2.7 percent of GNP), and the gross Federal debt was $914.3 billion (or 33.47 per cent of GNP); the inflation rate was 12.4 per cent. Last year the deficit was $220.7 billion (or 5.2 per cent of GNP), and the gross Federal debt was $2,132.9 billion (or 50.68 per cent of GNP); the inflation rate was 1.1 per cent. There is no way these figures can be tortured to support the claim that a deficit causes inflation (see editor’s chart below).

1987-10-5 Of Deficits and Taxes Editor's Chart of 1980 - 1986 data

Well, the states balance their budgets, so why can’t the Federal government? Of course, it could-provided we accepted one of two outcomes: Either private businesses and private individuals would have to increase their indebtedness to match the Federal decline, or we would have to have that depression. The reason for this is simple: The flip side of debt is credit, and credit is money. (If you want to be fussy: not all credit is money, but all money is credit.) Without debt, no credit; without credit, no money; without money, no business. That’s the way the capitalist system works. That’s the golden-egg-laying goose that myopic conservatives want to kill.

But what about our children and theirs? As Keynes observed, it is no favor to our children to neglect our natural and civic and domestic environments and thus save our children from the perils of indebtedness in their adulthood at the expense of forcing them to spend their childhood in squalor.

The foregoing merely suggests ways in which the anti-indebtedness argument is false. It does not claim that the present is the best of all possible worlds, that the level of our current deficit is exactly right, that we might not better buy different things with our money, or that we might not do better by financing the deficit differently.

Let it be said at once that the appropriate level of the deficit is a matter of trial and error. In spite of the most sophisticated programs run on the most powerful computers, Pandora’s box remains closed to us. Consequently, to say that we can fine tune the economy is an exaggeration. It is, however, a fact that we have, in the record of the past 40 years, proof that some kind of tuning can have significant results.

This brings us to the probability that at some time-perhaps tomorrow, perhaps the day after-we may want to tinker with the new tax law we hailed so proudly only yesterday. We may, in any case, want to remind ourselves that taxation is not necessarily for revenue only. Attending a debate in the Academy of Laputa[1],  Lemuel Gulliver was struck by a proposal “to tax those qualities of body and mind for which men chiefly value themselves …. The highest tax was upon men who are the greatest favorites of the other sex; and the assessments according to the number and nature of the favors they have received, for which they are allowed to be their own vouchers …. But, as to honor, justice, wisdom and learning, they should not be taxed at all; because they are qualifications of so singular a kind that no man will allow them in his neighbor, or value them in himself.”

That excellently bitter proposal is not explored in the 291-page Description of Possible Options to Increase Revenuesrecently prepared by the staff of the Joint Committee on Taxation with the staff of the Committee on Ways and Means. Part I examines what it discreetly calls” Revenue Areas [it would be lese majeste to call them tax increases] Addressed by the President’s 1988 Budget Proposals.” Adopting all of them would increase 1988 revenues by about $3.7 billion-scarcely noticeable in the shadow of a $160 billion deficit. Part II, taking up the document’s remaining 257 pages, examines “Other Possible Revenue Options,” most, if not all, having been suggested by members of the Committee on Ways and Means. These naturally reflect the various members’ interests and capabilities, and many are nutty (as are some of the President’s), while others are politically impossible, at least for now. Though it is likely that, as a whole, they exceed the magic $160 billion goal, there is no point in adding them up because many of them would work at cross purposes, and because nowhere in the pamphlet is there a discussion of the leading weakness of the 1986 tax law.

This weakness is the almost complete abandonment of progressivity. The great strength in the new law is that the grossest shelters were blown down. But, as is well told in Showdown at Gucci Gulch by Jeffrey H. Birnbaum and Alan S. Murray, the Senate Finance Committee grudgingly accepted the strength in order to achieve the weakness.

The attack on progressivity has been going on for several years. It was not so long ago that the top bracket in the personal income tax was 85 per cent. Then it was reduced to 50 per cent on “earned income.” Then to 50 per cent on all income, except for capital gains, which were taxed up to 35 per cent. Then capital gains were dropped back to 20 per cent. And now the top rate is 28 per cent across the board, with a complicated proviso that need not be of concern to you unless your taxable income exceeds $200,000. (The proviso, allowing for certain deductions at the lowest rather than at the highest rate, was one of the few good ideas of the original Bradley-Gephardt proposal. See “A Cautionary Tale of Tax Reform,” NL, January 27,1984.)

HOPE OF CHANGING the tax law’s rate of progressivity was abandoned by everyone who entered the Congressional conference rooms. It was insisted from the start-by Bradley-Gephardt in 1983 as well as by Reagan- Regan in 1986- that a reformed tax law would be revenue neutral. This shibboleth meant not merely that the total revenue raised under the new law would be the same as that under the old, but also that the various quintiles of income recipients would pay the same proportions of the total tax under both laws. An exception was that certain of the poorest of the poor, who had been added to the rolls in the reactionary surge of 1981-82, would now be dropped again.

The new law is certainly better than the old in that whatever is unreasonable or unjust in it is plainly stated rather than shoddily sheltered. But that is not to say it is more reasonable or just. It may, in fact, lead to greater injustice. It is probable that throughout the corporate world executives will demonstrate an increased eagerness for high salaries because they will be able to keep a higher proportion of them. It is probable, too, that the kind of investment banking that leads to raids and takeovers and greenmail will be stimulated, and that so will the securities and commodities and futures markets. It is even probable that the changes in the corporation tax will encourage many companies to increase executive perks, on the ground that the tax collector would get the money if it weren’t spent on limousines and Lear jets.

It will be noticed that the foregoing probabilities are to some degree contradictory. It is something of a paradox that lower personal and higher corporate taxes can be expected to result in both higher executive salaries and perks as well as higher winnings from speculating in the securities of the companies whose earnings are reduced by paying the salaries and perks.

This can happen all at once through an accentuation of the polarization of the American economy. The rich can become richer by keeping the poor in their place and by pushing more of the middle class down to join them. The trend can continue for a damnably long time without arousing much political reaction. The possibility of an economic reaction is more immediate. As Jean Baptiste Say, in one of his acuter moments, wrote, “There is nothing to be got by dealing with people who have nothing to pay.”

Our economy is bad because our morale is bad. For too many years, greed has been admired in high places and doing good has been sneered at. A steeply progressive income tax would be a sign of a shift in morale-which would be far more important than whatever increased revenue might be raised, and vastly more important than the size of the deficit.

The New Leader


[1] Readers with a bent for trivia may recall that one of the targets of Major Kong’s B-52 in the movie “Dr. Strangelove” was Laputa. According to IMDb, “Major Kong’s plane’s primary target, is an ICBM complex at Laputa. In Jonathan Swift‘s 1726 novel ‘Gulliver’s Travels’, Laputa is a place inhabited by caricatures of scientific researchers.”

By George P. Brockway, originally published September 7, 1987

1987-9-7 Morals of the Marketplace Title

1987-9-7 Morals of the Marketplace Trader

ETHICS IS suddenly a big topic. This is the doing of Ivan Boesky, Bess Meyerson, Jim and Tammy Bakker, and an obscure Marine lieutenant colonel, whose name I don’t recall. Those cynics who consider Lucifer/Satan the hero of Paradise Lost will not be surprised, nor will those realists who observe that the remembered hero of Watergate is not John G. Sirica but G. Gordon Liddy.

In all the current talk, business ethics has come in for special attention, and many an editorial has proposed required ethics courses in business schools. Lester C. Thurow, the new dean of MIT’s Sloan School of Management, resists the idea on the ground that the blight, if any, goes much too deep to be reached by a tacked-on series of lectures or bull sessions. Morals, he says, should have been learned at home and in the community long before graduate school. I resist the special course idea, too, but on the ground that if students have been learning bad ethics or no ethics, it is because they have been taught bad economics.

Economics used to be called an ethical science, an expression that resonates oddly in our ears. Come to think of it, our term, “social science,” gives off similar vibrations. Social relations surely have an ethical aspect (if it exists at all), while the propositions of the natural sciences (what we think of as proper science) do not. There is nothing moral or immoral about the solar system, or about the way electrons bond, or even about AIDS. Morals may be – most often certainly are – involved in the transmission of AIDS, but the physiology of the disease is neither right nor wrong. Indeed, it is only because the disease is a natural phenomenon that there is any hope of containing or curing it. Even the calls for sexual abstinence must depend on the fact that the disease obeys natural laws and is neither a random accident nor a supernatural visitation.

“Nature to be controlled,” as Francis Bacon said, “must be obeyed.” Thus disease control (which is a human end) uses medicines (which are natural means). Thus engineers use the principles of physics to achieve their ends. The ends are not natural, but the means are. It is frequently argued that economics presents a parallel situation. In 1874, Leon Walras, in his Elements of Pure Economics, distinguished at considerable length between economics as an ethical science, which considered what ought to be done; economics as an art, which taught how to do it; and economics as pure science, which described how it worked. Toward the close of the century, a similar tripartite analysis was made by John Neville Keynes (John Maynard’s father). In our day, Milton Friedman, perhaps indulging a puckish humor, has quoted favorably from the senior Keynes’ work.

The parallel between physiology or physics on the one hand and pure economics on the other is, however, false. There is no such thing as pure economics. Physiology and physics can be studied – must be studied – without regard to the willful act of any individual or group of individuals. But no antiseptic event of that kind occurs in economics. Walras, whose work was hailed by Joseph Schumpeter as “the only work of an economist that will stand comparison with the achievements of theoretical physics,” opened his analysis, after a long introduction, with the observation, “Value in exchange, when left to itself, arises spontaneously in the market as the result of competition.” But this pure proposition is immediately corrupted by willful humanity: “As buyers, traders make their demands by outbidding each other. As sellers, traders make their offers by underbidding each other.” (Walras’ emphases.)

Without those traders making their demands and offers, there is no economics, pure or applied. With those traders, economics becomes inextricably immersed in questions of morals. I do not mean merely that trade is impossible unless traders abjure fraud (at least up to a point), although certainly this is true. What I mean is that demands and offers – the fundamental elements of “pure” economics – are not acts of God or events of nature but acts of human beings who necessarily define themselves by what they do, including what they do in the marketplace. Perhaps more to the point: Demands and offers can be understood only as acts of will.

There has been no lack of attempts to develop other explanations, and they form the division of economics known as “value theory.” Prices are determined by the reconciliation of demands and offers, and demands and offers are said to be determined by values. There are three leading explanations of value. The first, found prominently in Adam Smith and Karl Marx, holds that things become valuable commodities in accordance with the amount of labor that goes into their production. The second, advanced by Jeremy Bentham, argues that only useful things are valuable, and that utility derives from the promotion of pleasure or the avoidance of pain. The third, credited by Leon Walras to his father Auguste, founds value on rareté, a combination of scarcity and utility.

All these explanations turn out to have exceptions. The labor theory cannot explain why a house in the Houston suburbs that sold for a quarter of a million dollars only yesterday can be bought for half that price today and will sell for a different price tomorrow. The utility theory cannot explain why proprietary drugs are more expensive than their generic equivalents. The simple scarcity theory cannot explain why gem-quality diamonds are more expensive than bluebird nests. Put them all together in the rareté theory, and you still can’t explain why baseball stars are paid in the millions of dollars and croquet experts have to pay to enter tournaments.

Of course, the problem of the exceptions has not gone unnoticed. The typical solution turns on a relaxed definition of utility. Proprietary drugs, for example, may be said to be more useful to some people because they carry an implicit guarantee of quality and so enhance satisfaction and pleasure or suppress apprehension and pain. The greater perceived utility naturally results in a higher price.

But see what has happened. The utility theory, like all the theories, was introduced to provide an objective foundation to value. Bentham intended his “felicific calculus” to be the equivalent of Newton’s laws of motion. In reality, though, it is highly subjective. Some people are pleased by drugs’ brand names and some are pained by the higher prices. Bentham himself summed up the situation in an aphorism: “Quantity of pleasure being equal, pushpin is as good as poetry.” One man’s pleasure is another man’s pain. Utility is what each individual says it is; it has none of the universality of gravity.

IRONICALL Y, the consequence was noted by William Stanley Jevons, a leader in developing Bentham’s utilitarianism into the modern quasi mathematical theory of marginal utility. Calling for increased efforts to collect economic statistics, he wrote, “The price of a commodity is the only test we have of the utility of the commodity to the purchaser …. ” And, he might have added, of its utility to the seller, too. Price may be explained by utility, but all we know of utility is price.

The other value theories are no less circular. Marx, recognizing that a lot of labor can go into producing positively harmful commodities, avers that “socially useful” labor makes value. So it is not labor that is the test of value; it is value that is the test of labor. The tree is known by his fruit. Walras’ rareté also leans on the weak reed of utility, as well as on scarcity.

The only way to keep a circular argument from chasing its tail is not to let the chase get started. Let us, therefore, return to the men and women who did the price-paying of Jevons, the offering and demanding of Walras, and the laboring and social evaluating of Marx. Who are these essential people? As Pogo might say, we have met them, and they are us.

The various value theories we have mentioned each try to make us into passive agents controlled by the economic counterpart of nature. Even perfect competition (the state imagined to provide perfect liberty) requires everyone to be what is called a “price taker.” Prices are then said to be made by the market.

Those who quarrel with the idea of perfect competition tend to do so on the ground that competition never is and never has been perfect. That is true enough, but the reason for this is that the notion of an impersonal market that sets prices is a pathetic fallacy.

Farmers are the standard textbook examples of price takers, unable to influence the price of what they sell, whether they produce more or less, and whether they sell now, or later, or never. Yet if all producers and all consumers – that is, all human beings – are price takers, where do prices come from? Only cynics claim that the individual voter is insignificant because he or she is merely one among tens of millions. The republic will not collapse if I fail to vote; it will collapse if no one votes. It is the same with economic agents. Someone has to set a price, or there is no price system and no economics. An economy of passive agents is a contradiction in terms.

Economics is one of the modes of ethics. Pure economics – economics without people and hence without ethics – is a myth. Morality can’t somehow be tacked onto economic affairs, which otherwise are amoral. Ethics is there at the beginning, or it is not there at all. It is always there because there is no economics that does not concern human acts, and all human acts are acts of will. What is true of economics, the theory of business enterprise, is obviously true of business itself. Business ethics is not merely the proposition that honesty is the best policy. The ethical question, in business and everywhere, is, What sort of person am I? There is no escaping it. That question is posed by everything I do.

The New Leader

By George P. Brockway, originally published July 13, 1987

1987-7-13 Much Ado About Saving Title

ON THE STRENGTH of two simple simultaneous equations, John Maynard Keynes held that saving equals investment. The argument goes like this: (1) Income (or production) equals consumption plus investment; (2) saving equals income minus consumption (or, income equals consumption plus saving); therefore (3) saving equals investment.

Interestingly, Keynes presented his argument in a mixed form-half definition and half equation. As it now appears in the textbooks, it looks like this: (l) Y = C+ I; (2) Y = C+ S; therefore (3) S= I. But Keynes used only the operational symbols (=, +, -), relying on English for the rest of what he had to say.

Was the mixed language meant to warn against use of the argument as an ordinary equation? Since Keynes didn’t make the point explicitly (and he wasn’t usually bashful), I may be reading too much into his text. Nevertheless, he did not use it as an ordinary equation himself; he noted that “Saving, in fact, is a mere residual”; and he ended the chapter by declaring, “the conception of the propensity to consume will, in what follows, take the place of the propensity or disposition to save.”

So-called Keynesians disregard the implicit warning and proceed to manipulate S = I as they would any equation. These people, whom Joan Robinson called “bastard Keynesians,” make up the majority of American and British economists today. When President Nixon said, “We are all Keynesians,” he should have said, “We are all bastard Keynesians.”

Indeed, if S = I is a statement about residuals, you can’t increase the value of Y, in equation (2) above, by increasing the value of S. Income or production is necessary to saving, but not the other way around. An ordinary equation, though, knows nothing of residuals. If Y = C + S is treated as such, you can increase Y (production) by increasing S (saving); and this has been a steady objective of national policy from President Kennedy on down to President Reagan.

For 30 years now, we have been bombarded with appeals to save, with inducements to save, with threats of disaster if we don’t save. To help us save, every Administration, Democratic and Republican, has cut taxes one way or another. Industry has been offered inducements to invest (S = I); business’ share of Federal taxes has been reduced from 28.6 per cent under Presidents Roosevelt and Truman to less than 6 per cent at present; the top personal income tax has been slashed from 85 per cent to next year’s 28 per cent; and starting with California’s Proposition 13, many states and municipalities have followed in the train. Yet our savings rate has steadily fallen and is currently at an all-time low.

Now, what has been done (and is still being done) is perfectly congruent with traditional (that is, pre-Keynes) economic thought. Traditionally, one observes that every new company is in business for weeks or months or even years before it has anything to sell, let alone any profit. All the while it is paying wages, otherwise the workers would starve. The entrepreneur has to have saved money to pay the wages; and farmers have to have stored (saved) food for the workers to buy. Either that, or everyone else’s rations have to be cut. Furthermore, the new company has to build a factory, and the materials going into it can’t also be used by someone else to build houses. So again the entrepreneur has to have saved money, and again primary suppliers have to have stockpiled (saved) materials, or have to deny them to other users.

The traditional story makes perfect sense – provided you forget that the modern economy runs on credit and is dynamic, not static. An entrepreneur may have saved a little money, but he borrows most of what he needs from banks, which have assembled the relatively small savings of a lot of people. Without those savings, according to the traditional story, the banks would have nothing to lend to entrepreneurs.

That, too, seems reasonable – until you remember how fractional-reserve banking works. Banks don’t lend merely the sum of the deposited savings but perhaps 10 times as much. That is, they retain a reserve equal to 10 per cent of their loans. Whatever the reserve, it is not an immutable figure; it is set either by the banks’ directors or by some governmental authority; it can be changed down or up, anywhere from zero to 100 per cent, or even more. It is a question of credit, belief, trust, faith, determination.

Let’s take the extreme case of zero reserve. An entrepreneur, who has no money, goes to a banker, who has no money. The banker says, “I like the cut of your jib, and I believe you have a good project. I’ll credit your account with x dollars, which you’ll eventually repay plus y per cent interest.” The entrepreneur draws checks on this account, and these are accepted by employees and suppliers, because they believe the bank exercises good judgment in making loans. The suppliers and workers deposit their checks and draw on them to pay their creditors, and the process continues ad infinitum. Maybe somewhere along the line a few people will want greenbacks or coins, and these can be purchased with a check. The whole edifice is built on faith. Even the greenbacks and coins are articles of faith. How else is a hundred-dollar bill worth more than a one dollar bill?

So a company has been created out of nothing, and sooner or later the banker gets back the money that he didn’t have in the first place, plus interest. It may seem outrageous – not to say incredible – that the banking system could do all this without any savings whatever. Yet a zero reserve is scarcely less credible than a 10 per cent reserve, or than a 90 per cent reserve. As far as an entrepreneur’s need for money is concerned, no one has to have saved anything at all. It is, to repeat, entirely a question of the expansion of credit and credibility.

Nor, in a modern economy, need any special measures be taken to ensure that the workers have food and that the factory builder has materials. One way or another, everyone in a civilized society will have food to eat whether there are jobs or not; no farmer plants an extra row of beans just because someone gets a job. Likewise, steel makers and brick manufacturers organize their output in as steady a flow as they can manage.

Primary suppliers and their bankers have faith that the economy will advance at a certain rate, and the rate includes the actions and the needs of entrepreneurs.

In sum, no one has to save money, and no one has to save things. Saving is a mere residual.  Consequently, all the palaver we’ve listened to about saving for the past quarter century is beside the point. Worse than that: It has caused grave distortions of the economy.

First, there is the question of what happened to all the tax reductions that were made to encourage saving. The saving wasn’t needed; so it didn’t occur. Yet the tax reductions did occur, as the deficit is our witness. Where did the money go? A good bit of it went into consumption; that’s what fueled the so called recovery. The lion’s share, however, has gone into speculation. The stock market boom has been paid for partly with tax dollars, partly with the borrowings of speculators (for banks lend the same sort of money to speculators as they do to producers), and partly with the trade deficit, whereby others (mainly Japanese, Germans and Taiwanese) have traded their goods for shares in our industries and infrastructure.

Second, there is the question of how the tax reductions were distributed. Like traditional economies, bastard Keynesianism reasons that in order to expand production, you have to expand saving, and therefore you must get more money into the hands of savers. Who are the savers? Those who don’t need the money, of course. Those who need money obviously will spend it; they can’t afford to save. So the tax breaks, in a steady stream, have gone to the rich. The poor, especially, the way it happens, the working poor, have got the short end of the stick. Even those properly dropped from the 1987 tax rolls are merely the people who had been improperly added to the rolls back in 1981.

AS NOTED, the so-called recovery (Y) has been fueled by consumption (C). Neither Y nor C is a residual, for production and consumption are implicit in the simplest economy – in life itself. If consumption were greater, the recovery would be greater. Consumption would be greater if tax benefits went to the poor, who would spend them, rather than to the rich, who pour them into speculation. Reaganomics has not only rewarded the rich for being rich and punished the poor for being poor; its transmogrification of greed from a deadly sin to a virtue has so skewed the rewards and opportunities of our economy that one fifth of our people and one-fifth of our industrial capacity are either underutilized or not utilized at all.

Well, Reaganomics is not to blame for all our troubles; it has merely aggravated them geometrically. The time is out of joint and will not easily be set right. As I have said several times in this space, some sort of employee ownership will be necessary. I say “some sort”  because many proposals have been made. The sad truth is that they are scarcely noticed either by those who claim to be experts or by the general public. Characteristically, the standard book review media don’t pay attention to proposals that are made in book form. I don’t find this aloofness a point in their favor.

While you may have heard of Schumacher’s Small is Beautiful (though not likely from your favorite reviewer), I’ll wager you’ve never heard of Democracy and Economic Power by Louis O. Kelso and Patricia  Hetter Kelso, published last fall, or of their earlier book, Two-Factor Theory: The Economics of Reality. But TwoFactor Theory is one of the few books that have made a difference in the world. It launched the ESOP movement in 1967. What is an ESOP? It is an Employee Stock Ownership Plan. Former Democratic Senator Russell Long of Louisiana successfully sponsored the scheme in Congress in 1974, and now there are more than 7,000 plans in effect, covering some 10 million employees.

I have a reservation about the ESOP law as it is currently drawn and several more about extensions proposed in the Kelsos’ new book, but they’re relatively unimportant. The Kelsos’ is the only game in town that is actually being played. What they have done and what they propose are of the utmost importance to the general welfare. Theirs are books that every good citizen should read and ponder.

The New Leader

By George P. Brockway, originally published April 20, 1987

 

1987-4-20 Profiting from the Medigap Title

HAVING BEEN house-bound for a few days recently, I watched a lot of daytime TV. It’s something everyone should do occasionally-say, every five or 10 years. It mortifies the brain. Only someone like Marvin Kitman, with unshakable courage and emotional stability, could possibly do it on a regular basis.

Of course, you learn things. You learn that 19 minutes into the program, Perry Mason or his client will knock on a door, be astonished to find it unlocked or ajar, and stumble over a body. This moment, which Aristotle might have called the anagnorisis, comes as a relief, because the previous 18 minutes (including commercials) have been devoted to setting the California scene and peopling it with a disagreeable assortment of land speculators, oil wildcatters, superannuated “investors,” and movie hopefuls down on their luck. The crowd could easily pass for a reunion of the President’s[1] most trusted advisers and supporters.

After a while, if you don’t have remote control to protect yourself, the commercials begin to impinge on your consciousness. You become aware, first, that most of them are hard sell: “Call this toll- free number now. Have your credit card ready.” Then you notice that certain sorts of business seem to find TV promotion particularly effective. The sort that attracted my attention (it is, after all, directed at people like me) was insurance, especially Medicare supplements.

In these insurance commercials an oily or folksy “personality,” usually from the entertainment world, earnestly recites some scary figures on what Medicare doesn’t cover. This is known in the trade as the Medigap, and we’ll be hearing a lot about it as the national debate over catastrophic medical expense [2] continues. I must confess that most of these personalities (except for Roger Staubach) seem to have achieved eminence unbeknownst to me, but they do read their lines well. One of them so impressed me with his concern for my welfare that I decided to call the toll-free number (“The information is free, and so is the call”). Having called one, I then called them all.

Eliminating duplications (different entertainers, different phone numbers, but same outfit), I made six calls. Several were to Valley Forge, Pennsylvania companies. As Samuel Johnson told us, patriotism has its uses, even if it is only subliminal. The others were likewise to Pennsylvania or to Delaware companies-a curious concentration that suggests something about those states’ insurance regulations. The pleasant young women who answered my calls promised information in the mail in one to six weeks, and by golly they delivered. Follow-ups come trooping daily, but as promised, no salesman has visited me (at least not yet), and there has been only one telephone pitch.

The mailing pieces are wonderfully elaborate. In accordance with received direct-mail doctrine (I once dabbled in that black art), each has a long letter signed by the TV personality recapitulating his sales pitch, addressed to me by a computer (one of which knows me well enough to use my first name). In addition there are several separate circulars (the theory is that one of them may catch your eye as you fumble to pick them up and stuff them in the wastebasket).Some are printed in four colors and gold, some merely on colored paper. They describe the great risks you run by not having the coverage set forth in the various schemes being offered, and give an ecstatic description of the sponsoring company, together with its evaluation in Best’s Insurance Reports and an emotional endorsement from “Mrs. P.M.K., Lawrence, Kans.” A formal application blank that looks like a stock certificate, a plastic identification card for your wallet, and a return envelope marked “RUSH” in big red letters complete the pricey packet.

Although the programs vary slightly from company to company, the sales pitches invariably emphasize the rising cost of hospital care and the declining percentage of it covered by Medicare.

The hospitalization Medigap runs from a deductible of $520 to a total of $20,020 after 150 days of confinement. That’s pretty scary, but the insurance company will pay every cent, plus all “Medicare allowable” hospital expenses for one extra year. That’s pretty comforting, until “Medicare allowable” inadvertently reminds you the Medigap is by no means closed when you buy one of these policies.

But look you: The average hospital stay for senior citizens is only 8-9 days, with stays of 150 days very rare indeed. Further, in very small type the circular hedges: “Sickness, injury, or any physical condition for which you received medical advice or medical treatment during the six months prior to your Certificate’s

Effective Date will not be covered until six months after such date. Also, any illness, treatment, or medical conditions due to an act of war (whether declared or undeclared), and any services or facilities not covered by Medicare, are not covered.”

Noting that nursing homes are thus excluded in war or peace, let’s go on to examine that hospital stay. One company offers a “deluxe” and a “basic” plan. The only difference between the two is that the deluxe covers the initial $520 deductible. The difference in cost to you is $18 a month, or $216 a year. The company clearly figures the deluxe plan will at the minimum earn back the deductible exposure if the average policyholder goes to the hospital no more than once every 29-30 months-a very safe bet once you stop to think about it. The $520 deductible sounds formidable when mouthed by a TV personality and it certainly is a snide provision for a government program that pretends to cover the citizens of the republic-yet $216 a year is a truly formidable price to pay for what is in effect $304 worth of insurance.

As I’ve mentioned, Best’s Insurance Reports is often quoted to show how reliable the advertiser is. An exceptionally profitable company is obviously exceptionally reliable; it will be able to pay all probable claims against it. But there is an irony here: A company that is exceptionally profitable is probably charging exceptionally high premiums. Best’s reports this side of the business, too. The relevant statistic is the loss ratio the total of claims paid divided by premiums charged.

Among the TV advertisers I checked on, the worst had a loss ratio of 46.4 per cent, and this would have been even lower if allowance had been made for the profits the company makes by investing its float. Another’s loss ratio was 47.5 per cent, and the rest were in the low 50s. In contrast, the plan of the American Association of Retired Persons (AARP) has a loss ratio in the upper 70s. Yet as any AARP member knows, their plan carries a considerable advertising load too. AARP, Blue Cross and Blue Shield, and the similarly effective extensions of company group policies can’t quite dispense with selling expenses.

Now, everyone has tales to tell of Medicare delays and foul-ups, but at its bureaucratic worst it is far more cost-effective in rendering service than the best of the plans sold by the insurance industry. Its loss ratio is in the high 90s.

The reasons for Medicare’s relative efficiency are not far to seek: (1) Probably the most important is that it has no advertising or sales overhead; (2) next most important, no profits have to be made for stockholders; (3) it requires no cash flow to cover high executive salaries (the top government salary  wouldn’t tempt an assistant vice president from a commercial company); and (4) it can operate with little or no reserve, because the government won’t let it go bankrupt even if actuarial expectations should prove disastrously wrong. (The presumed need for a reserve is at the root of the wails that Medicare rates must be raised. A tortuous argument may be made for a Social Security reserve; but with Medicare, both premiums and payouts are current, and the margin of actuarial error is very small. There’s no necessity for me to pay now for service I may need 10 years hence, since I’ll be paying as long as I live.)

CON ARTISTS separate the unwary from their money in many ways. They sell junk jewelry on TV; why shouldn’t they sell junk health insurance?

The difference is that no one has to have jewelry, whether junk or not. No one has to have sugar-free chewing gum, or the latest in soft drinks, or a set of picture books about ghosts, witches and other supernatural epiphanies. Consequently, in all these cases-indeed, in the case of most products that enlist the hearts and minds of advertising apparatchiks- the price of the product is of little social importance. It is even of little personal importance, as witness the fact that proprietary drugs far outsell their less expensive generic equivalents.

Health insurance is something no one can do without. We all get it somehow. We don’t necessarily buy it, and it’s safe to say that no one buys all that might be needed (a friend of mine was told by an agent that “adequate” coverage would cost $1,800 a year for him and slightly less for his wife). If we don’t buy it, where does it come from? We’re then self-insurers, of course. We run the risk ourselves. This may be by necessity or design. We may not be able to afford the premiums, or we may be able to pay cash for the most esoteric medical attention money can buy. But one way or another, bad or failing health is a risk we must and do face.

Some kind of coverage being vital and inevitable, health insurance is no longer in the same class with soft drinks and picture books. The risks will be covered. The question is, how well?

In the United States today they are not covered well. In his new book The Next Left, Michael Harrington tells us that the United States devoted a higher percentage of its gross domestic product to health care than any other industrialized nation, yet has the least satisfactory health service. While this is partly a consequence of our paying doctors on a fee-for-service basis, it is also a consequence of our turning so much of our health insurance over to profit-oriented companies, and leaving so much of the rest to the vagaries of self-insurance.

We know that competitive enterprise is supposed to develop better products at better prices, and we see this actually happening. But in the health insurance “industry” what we mainly see is the development of more imaginative ways to sell a “product” that should, in a democratic society, be uniformly available to all. That is a fact to keep in mind as the Administration intensifies its effort to turn any improvement in Medicare coverage over to the insurance “industry.”

The New Leader


[1] Editor’s note: President Reagan was originally a movie actor

[2] Editor’s note: this phrase is italicized to remind the reader that it was written 25 years ago and describes in the same terms the challenges of funding medical costs that are used in 2012.

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