Tuesday, May 19, 2009

Social Welfare, Socialism and Healthcare

There is considerable confusion over the meaning of the emotion-laden word "socialism." Socialism is government ownership of productive assets; social welfare is the redistribution of incomes to fund entitlements.

Many readers decry what they perceive as the "creeping socialism" of the Obama administration. Some are referring to the quasi-governmental ownership of private enterprises like various banks and General Motors, while others are referring to the "tax the rich" and "unions can do no wrong" ideology which seems to fuel many of the Obama administration's policies.

Before we debate the pluses and minuses of socialism, we need to be clear on exactly what the word means. In the U.S., "socialism" carries a heavily negative connotation of government redistribution of wealth--the European model of a high-tax, generous social welfare economy is seen as "socialist" while the lower-tax (in terms of basic tax rates but not necessarily in reality) U.S. model is seen as "capitalist" (heh).

Here's one way to distinguish between "pure" socialism (ownership of productive assets) and social welfare: The Veterans Administration hospital system is owned lock, stock and barrel by the Federal government. It is thus socialist. The VA may hire private subcontractors and purchase goods and services from private enterprises but all the decisions are made by the government. If the government decides to, it can sell off VA-owned assets such as land or hospitals.

Medicare is a system of care which is funded by the government, but the government does not own the assets of the system. However, the government controls the prices paid vendors and the prices paid by Medicare enrollees--in essence, a closed system in which the costs, whatever they might be, are paid by those outside the system: the taxpayers.

But Medicare providers (clinics, hospitals, etc.) are private and thus they can (and do) close. Thus it is possible that a government-managed and funded program could find no private vendors willing to participate. This is quite different than the VA, which is owned by the government.

In this sense, Medicare is fundamentally a social welfare program. In terms of management, then Medicare is unequivocally government-controlled. It is a situation ripe for confusion, as it is clearly not socialist in ownership but clearly socialist in terms of government control.

Nonetheless, both providers and participants can always choose to opt out of Medicare. A private system of providers exists which accepts cash, private insurance and Medicare payments alike.

Put another way: a social welfare program can exist by taxing free enterprise and distributing the revenues to other private enterprises to provide a service (healthcare) the government deems worthy of such income redistribution. The government owns nothing except the right to collect taxes.

If General Motors emerges from bankruptcy owned 51% or more by the Federal government, then ultimate control rests with the government; it is in essence "socially owned" and minor private ownership does not make it somehow capitalist.

The fundamental problem with government-owned enterprise is that the firm is no longer accountable to the marketplace. Thus the Federal government operates the VA at whatever cost is deemed bearable (and the VA appears to be relatively well-managed and efficient) and if it decided to manufacture autos (via ownership of GM) at a loss, it could do so indefinitely--unless taxpayers rebelled.

The cost of VA and Medicare care is hidden from the participant, but they know one thing for sure: whatever the total tax they have paid to support the government, their VA or Medicare benefits will far exceed the taxes they paid in. Thus the "rational economic decision" is to vote to support Medicare even if the cost of Medicare is driving the government to insolvency.

If everyone acts "rationally," then the costs of the programs, be they government owned or merely government-controlled, will run away because there is no price/cost accountability.

Competition is impossible because the government can operate a system or business at a loss indefinitely; thus any private alternative will be driven out of business, leaving the government in complete control.

So is government ownership better or worse than government control? On the face of it, the VA, totally owned and managed by the government, provides much lower-cost and more effective care to millions of veterans than the social-welfare Medicare does paying private enterprises to provide care.

The argument here is that there is no profit motive within the VA to load patients up with needless tests, meds and procedures. In this sense Medicare is the worst possible of all worlds: a system without market accountability and huge incentives to loot/over-bill/ load the patient up with needless meds, tests and procedures.

The counter-argument is that the government-owned/managed system is not accountable to taxpayers, who as individuals generally benefit greatly by paying thousands in taxes and receiving hundreds of thousands of dollars of care. The bureaucracy is supposedly accountable to "the people" via elected officials, but the chain of accountability is broken in two places: elected officials are bought off by those raking in billions of dollars in revenue form Medicare, and the voting public (note relatively few young citizens vote) has zero interest in controlling Medicare costs since they are either at the trough getting benefits or intending on reaching the trough soon enough.

As long as tax revenues are rising, the lack of accountability has little effect. Thus Medicare can grow by 6% a year for decades even as the economy only grew at 2-3%. But now the economy has entered a Depression in which tax revenues will decline for the first time in decades. At this moment the Federal government is covering the vast gulf between its own spending and tax revenues by borrowing $2 trillion a year. The global bond and foreign exchange markets will eventually constrain that borrowing by either devaluing the dollar or driving interest rates up (or some of both).

When there is no accountability via the market, then the only limit on government spending is its ability to borrow. Right now the American public believes the propaganda that its government can borrow endless trillions with no consequences to little old me and my entitlements. That will be revealed as propaganda next year as the borrowing runs into forces beyond the Federal government's control: the depreciation of the dollar and the cost of borrowing on the global bond market.

Given the choice between government ownership (VA) and a "please loot and overmedicate us" Medicare system, I'd go with the VA model. The bastardized socialism of Medicare (no ownership, no accountability to anyone) is the worst possible system; at least the pure socialism of the VA eliminates the stupendous incentives for looting (bill for services) and the malpractice nightmare in which providers' attempts to ward off lawsuits via endless tests and specialists end up costing more than the lawsuits (go ahead and sue the VA; good luck with that).

Given a choice between government care and a completely free market, I'd choose the free market--as "unfair" as it is. If people had to pay all their medical care in cash, an astonishingly rapid transformation would take place: virtually no provider could collect the bills Medicare routinely pays. The single greatest driver of Federal insolvency (Medicare) would disappear.

In terms of social welfare, the government could then fund modest programs in support of wellness and not getting ill in the first place, instead of funding programs which encourage illness because it's so darned profitable, while keeping people well is insane because there is literally no profit in that at all.

Let's not forget that plain vanilla social welfare programs are modest in cost compared to open-ended entitlements. For instance, the entire food stamp program (SNAP) serves approximately 32 million people at a cost of just over $30 billion—a mere 1% of Federal outlays. Section 8 Housing Vouchers costs about $16 billion—less than one-half percent of Federal outlays. The entire Housing and Urban Development department which also serves the homeless is about 1% of Federal outlays.

The VA's medical-care budget is about 1.5% of Federal outlays--$47 billion: The VA's 2010 budget website.

In contrast, Medicare is over $450 billion and climbing, with no limits in sight. Many look to the Pentagon as the biggest budget expense; Social Security holds that honor with the Pentagon and Medicare currently vying for the second spot (depending on what you include). But Pentagon spending in terms of annual growth is no match for Medicare, and if we combine Medicare and its sibling Medicaid then they already far surpass the Pentagon.

HHS 2009 budget:

In the past 25 years, Medicare spending has grown from $52.6 billion in FY 1983 to an estimated $396.3 billion in FY 2008, a 7.5 fold increase. Currently, Medicare spending consumes 16 cents of every Federal dollar spent, and is third only to Social Security and defense spending. In FY 2009, funding for total Medicare spending, which will help 45.5 million Americans, is expected to be nearly $425.5 billion, an increase of $29.2 billion over the previous year.

Obama 2010 budget highlights by agency:

The 2010 budget for Medicare, the health insurance program for people 65 and older, is proposed at $453 billion. That's a 6.5 percent increase from 2009.

Medicaid, which covers certain poor and disabled people, would be funded at $290 billion in 2010, up 12 percent from 2009.

2010 Defense budget request is $533.7 billion (plus $130 billion for the two wars)

If we consider Medicare and Medicaid two parts of the same entitlement program (healthcare) then that total of $743 billion already dwarfs Pentagon spending by over $200 billion (not including hot war costs) or $80 billion including the two-war costs--roughly the entire budgets for the EPA ($10B), Education ($46B) and Agriculture ($26B) combined.

Note that Medicare costs rose by $57 billion in just the last two years. Chart that rate of increase and in almost no time at all Medicare/Medicaid will suck up the entire (fast-dwindling) tax revenues of the Federal government.

Social welfare per se need not be stupendously costly. Open-ended social-welfare programs which are essentially socialist in terms of government control while maintaining a profit incentive are the worst of all possible worlds. Any program/entity without accountability to the marketplace and/or its "owners" (be they the public or private) is doomed to be looted and doomed to eventual insolvency.

With insolvency of Medicare and thus the entire Federal government only a matter of time (say, 2014-15), we can anticipate the collapse of Medicare and a replacement system modeled on either the VA or food stamps: a social-welfare program of modest size, clear, limited mandate and relatively visible accountability to its "owners," the taxpayers. 

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