The main reason Congress is having a difficult time with healthcare legislation is a failure to recognize the costs of our current healthcare system. These costs have become so great that a move to free market healthcare can save Americans $2.3 trillion a year. Data from the World Bank show the cost of healthcare in the US can be three times what it is where a country relies on the free market.
My own experience with healthcare in Mexico confirms the World Bank data.
Six years ago I had a first-hand opportunity to compare costs in Mexico’s private healthcare system to those in the US. At the time I estimated healthcare costs in Mexico were approximately half the cost in the US. A more recent experience suggests the cost difference has increased substantially.
My wife, who has asthma, recently contracted the flu while in the US. For two days (Friday and Saturday) her doctors refused to see her due to an influx of other patients seeking appointments. The office is closed on Sunday.
In spite of a difficult Sunday night, she insisted on keeping our scheduled flight to Los Cabos, Mexico on Monday. That afternoon we called a private sector Mexican doctor. He saw her immediately at the hospital. After several exams, an x-ray and blood tests, he said bronchitis had turned to a beginning case of pneumonia.
After three hours of intravenous feeding with antiviral medicine and antibiotics, her condition stabilized. Before leaving, we received seven different medications to help her recover. The total cost for doctors, assistants, x-rays, intravenous feedings, blood tests, medicines, and follow up visits was $403. In the US, we would have felt fortunate to pay that amount for the x-rays alone.
The total amount was payable on demand with a credit card, as with all normal transactions in a free market system. Comparing healthcare costs elsewhere to those in the US are complicated by many factors. The most significant factor is the lack of a free market in the US. Without a market, it’s almost impossible to know the real cost of any item.
The current US healthcare system resembles the old Soviet system. Government dominates the decisions of who gets healthcare coverage, when, where, and at what price. This is a highly inefficient system, which has been made even more inefficient by the “Affordable Care Act.” The question is how much more?
Aside from my personal experiences, there are other indications we are paying three times the amount we could be paying for healthcare. This conclusion is supported by data compiled by the World Bank. It shows healthcare costs per capita in the US are three times what they are in Singapore.
Singapore’s healthcare system utilizes many of the efficiencies of a free market system. Most routine healthcare expenses are paid by individuals out of their health saving accounts and prices are fully transparent. There is also significant government involvement to make sure everyone has access to high-quality, inexpensive healthcare.
Current US healthcare costs are upward of $3.5 trillion a year. The World Bank comparison suggests $2.3 trillion of this amount represents the waste due to our inefficient system.
Eliminating such waste through a free market system would lower the cost of healthcare so dramatically there would be more than enough resources to provide high-quality healthcare to all.
Step one: Repeal Obamacare
Step two: Replacement Bill:
Section one: Individuals in every state shall have the freedom to purchase any health insurance that meets their needs
Section two: Companies shall have the freedom to offer any health insurance plan in any state at any price in order to serve the needs of individuals
Section three: All healthcare insurance must be portable so individuals have continuous coverage
Section four: Government shall pass no law preventing access to the delivery of healthcare to individuals
Section five: All health providers must openly display their prices for any services, procedures and medications they may provide.
Section six: Government shall provide funds for the care of the indigent and those with special needs
Financial markets are weighing in with positive signals. Both stocks and interest rates are anticipating positive policy changes, a faster pace of growth and stronger earnings.
The policy changes have already begun. President Trump is using his vast executive powers to deregulate as much of the economy as he can. His cabinet appointments are also working to take the shackles off the economy. Deregulation alone can add hundreds of billions of dollars to real growth.
One of the most critical areas for deregulation is healthcare. The US healthcare system has devolved into Soviet style system where government controls the prices and shape of the product. This has led to healthcare costs that are two to three times what they would be under a free market.
The House GOP plan for reforming healthcare revolves around cuts to Medicaid. The worthwhile objective is to block-grant Medicaid funds to the states. They would then be responsible for reforming the system. The plan also promotes medical savings accounts, which hold the potential to control costs.
The major problem with the House plan is the government would continue to dictate what must be included in health insurance policies. This is the same approach that contributed to the explosive rise in insurance premiums before Obamacare and escalated the costs after Obamacare.
In contrast, true free-market reforms would give individuals the freedom to buy whatever type of insurance the free market comes up with from anyone anywhere in the world. Based on what has been accomplished in other countries, free market reforms would cut the cost of healthcare anywhere from 50% to 66%. Since the US will spend upwards of $3.5 trillion this year for healthcare, the potential savings would amount to roughly $2 trillion a year. Savings of this magnitude would make it much easier to solve the problem of those who are unable to take care of their own medical needs.
The bill introduced by the House does not repeal Obamacare. It amends it. For this reason alone, the bill should be rejected. Anyone who promised to repeal Obamacare will be violating a major campaign promise by voting for this bill.
As for the bill itself, it’s a major disappointment because it deals mainly with insurance instead of moving toward a free market in health care. The entire bill includes details surrounding the insurance market, which is why it takes over a hundred pages. Focusing on insurance instead of making healthcare more of a free market, means the bill falls short in an effort to dramatically reduce the cost of healthcare.
There is one provision that does hold the potential to reduce costs. This is the expansion of health savings accounts (HSAs). Shifting incentives for more people to pay for healthcare from their own accounts creates an incentive to reduce costs.
However, the House bill has no further incentives for freeing up the healthcare market. The President’s plan to give individuals the freedom to shop for insurance across state lines is missing. Creating a national market for healthcare would open the market to the greatest number of low cost plans.
There is also no movement toward transparent healthcare pricing. Doing so would enable both individuals and insurance companies to make informed decisions about the costs of health-related services. In Singapore, where healthcare costs are a third of what they are in the US, prices are clearly posted everyone knows what they are.
The bottom line is both the President and the House GOP have failed in their first major legislative effort--reforming healthcare. Unless they can recover, it does not bode well either for a successful tax reform or for the type of growth in the economy everyone is hoping to see.
Will President Trump rely on his instincts or will he allow the political establishment to dictate tax policy? The answer will determine the extent to which Trump can to deliver on his ambitious promise of real growth in excess of 3%.
During his campaign the President proposed cutting taxes by $1 trillion a year. His instincts on taxes are correct. Every successful tax cut in US history had one thing in common—sharply reduced tax burdens without major offsetting tax increases.
In September, Trump released a detailed tax plan, which The Tax Foundation estimates would cut taxes by about $500 billion a year, or 2.6% of GDP. Interestingly, the Tax Foundation also estimates the size of the 1981 Reagan tax cuts at 2.6% of GDP. Both estimates are based on static analysis, meaning they do not allow for any increase in revenues from faster growth in the economy.
The House GOP plan extols the virtues of tax cuts. However, instead of using successful tax cuts as a guide, the plan looks to the Tax Reform Act of 1986.
The 1986 tax act was a complete failure. Although it reduced some tax rates, it was designed to be revenue-neutral. This means any shortfall in revenue from cutting taxes had to be offset by raising other taxes. Among the offsetting tax increases were a higher tax on capital gains and a major change in depreciation allowances.
Given the complexity of the tax system, any tax increase can have unintended consequences. This was the case with the 1986 tax reform. Its tax increases contributed to a collapse in real estate prices, the failure of over 1,000 banks, and a recession in 1990. President Trump has rightfully criticized the destructive impact of the 1986 reforms.
Similar to 1986, the current GOP tax plan “...envisions tax reform that is revenue neutral.” The Tax Foundation estimates the GOP plan would cost the government $740 billion a year based on static analysis. In order to make up for the lost revenue, the GOP plan increases other taxes by an estimated $500 billion a year. The net tax cut of $240 billion is at the most 1.3% of GDP.
The Tax Foundation estimates that most of the net loss of $240 billion will be made up from faster growth in the economy. As a result, the real loss in revenue to the federal government would amount to only $19 billion a year.
There are two main issues surrounding the ability of the GOP tax plan to generate the type of growth the President hopes to achieve. The first is with respect to the magnitude of the tax cut. The static analysis cut of $240 billion a year represents less than half the magnitude of the 1981 tax cuts. Call it Reagan lite. After allowance for growth, the GOP tax plan represents a statistically insignificant tax cut of only .001 percent of GDP. This is not a major tax cut.
The second issue comes from the plan’s tax increases, primarily the border tax. This restructuring of the corporate tax will disrupt the international supply chain. Doing so promotes the same type of unintended consequences found in the 1986 reform.
President Trump’s instincts on the magnitude and type of tax cuts necessary to ignite rapid growth are correct. His plan is similar to all successful historical tax reforms. One of the President’s challenges to achieving his growth targets will be to convince the Congress to trust his instincts over those of the political establishment.
President Trump’s call for an extensive review of the Dodd-Frank financial reforms is a major positive for the economy. Several years ago I completed an analysis showing the cost of these regulations amounted to a staggering $200 billion a year. A summary of the analysis is presented below.
The main problem with Dodd-Frank is its assumption that the banks were the cause of the financial crisis in 2008. As I have argued how the real culprit leading to the financial crisis was the Federal Reserve. It did so by selling $300 billion worth of securities leading up to the ciris in the fall of 2008. (See my complete analysis in the economic/finance section.)
There are a large number of bankers who have explained to me how they have had to replace a large number (in some cases 10% of their employees) with others to comply with various new government requests for information and reports. In many cases, the government requests are by newly hired young people who know little, if anything, about banking or financial markets. Hence, the busy work of complying with these requests represents a cost to the economy without any offsetting benefit.
Trump knows about the extensive waste involved in this legislation. The review he has ordered has the potential to redirect some $200 billion in resources from waste to productive use. Doing so will help increase the typical worker’s living standards by anywhere from $1,000 to $2,000 a year.
Dodd-Frank's Real Cost Is Nearly $200 Billion A Year
By ROBERT GENETSKI
Posted 12/12/2014 06:00 PM ET Investors Business Daily
In the wake of the recent elections, there is one thing both parties still agree on: Middle-income families are being squeezed and voters are angry.
But why? And what should be done about it?
Our politicians have placed any number of barriers in the way of prosperity, and one of the most costly has been the Dodd-Frank financial reforms (DF).
Congress passed this 2,300-page law in 2010. It since has spawned a massive new regulatory environment with an impact reaching far beyond the nation's $1.1 trillion financial services industry.
The Government Accountability Office provided an original estimate of Dodd-Frank's direct cost: $2.9 billion over the first five years. If that is accurate, it means the law will cost the taxpayers roughly $600 million annually, or $5 for each private-sector worker.
The direct cost to taxpayers is only the beginning. Historical estimates show private-sector costs to comply with government regulations tend to be 36 times the direct cost to government.
If Dodd-Frank is typical, the annual cost of compliance will be more like $22 billion, or $188 for each private-sector worker.
Unfortunately, there are numerous indications the Dodd-Frank regulations are far from typical. Since the passage of the law, various banks, from the smallest to the largest, have announced layoffs amounting to roughly 10% of their employees.
In many cases, the layoff announcements came while banks also announced they were aggressively hiring workers to comply with new regulations.
If the 10% figure is characteristic of the entire financial industry, it means Dodd-Frank has a compliance cost of close to $120 billion annually, or just over $1,000 for each private-sector worker.
As burdensome as that estimate sounds, it too likely understates Dodd-Frank's compliance costs. The financial industry is unique in directly impacting every other part of the economy.
Thus regulations affecting finance have a disproportionately greater impact than other regulations.
It's more appropriate to compare compliance costs of DF with those associated with previous financial reform legislation. Sarbanes-Oxley (SOX), the predecessor to Dodd-Frank, created 16 new regulations.
Various surveys showed the cost of complying with those regulations from 2004 to 2007 averaged roughly $9 billion a year.
In a recent analysis, the Davis Polk law firm identified 398 explicit new regulations created by Dodd-Frank, making it at least 25 times more extensive and complex than Sarbanes-Oxley.
If the costs of complying with Sarbanes-Oxley are the more reasonable gauge for those associated with Dodd-Frank, it could easily cost 25 times more than its predecessor, or $225 billion a year. This amounts to almost $2,000 for each private-sector worker.
In addition to the size and complexity of DF, the legislation has taken on a life of its own. By last year, the original 2,300 pages of the law had spawned 14,000 additional pages of regulations.
And regulators have gotten around to implementing only 39% of those regulations. This is a law that keeps taking more and more out of the economy.
Dodd-Frank seriously undermines people's living standards. Whenever laws take resources away from the production of goods and services people want and allocate those resources for the paperwork government demands, living standards decline.
This is particularly true for low- and middle-income families, whose incomes tend to be disproportionately affected by such actions.
When fully implemented, Dodd-Frank is likely to reduce the goods and services available to a typical U.S. worker by anywhere from $1,000 to $2,000 a year.
Repealing this horrendous piece of legislation is one way to restore the gains in living standards that were once a hallmark of the U.S. economy.
• Genetski is a policy advisor to The Heartland Institute and one of the nation's leading economists and financial advisors. He also heads ClassicalPrinciples.com.
There appears to be a major conflict between President Trump and the House GOP plan for tax reform. The conflict is due to the President’s instincts for favoring tax cuts and his concern over the unintended consequences from a fundamental change in tax policy.
During the campaign, the President proposed cutting taxes by roughly $1 trillion a year, $10 trillion over the next decade. His instincts on taxes are correct. Every successful tax cut in US history had one thing in common—sharply reduced tax burdens without major offsetting tax increases.
The current GOP tax plan extolls the many virtues from tax cuts. Unfortunately, it uses none of the successful plans as a model. Instead, its model is the Tax Reform Act of 1986, which the House Plan claims “…laid the foundation for decades of American job growth.”
This isn’t true. While the 1986 tax act included many positive tax cuts, it was also designed to be revenue neutral. This means any revenue the government might lose from lower tax rates has to be replaced by offsetting tax increases.
To offset the expected loss in revenue, the 1986 tax reform raised a number of other taxes. President Trump knows from first-hand experience how these other taxes laid the groundwork for a collapse in real estate prices, the failure of over 1,000 banks and a recession.
Similar to the 1986 reform, the current GOP plan “...envisions tax reform that is revenue neutral.” While the new plan allows for a modest increase in projected revenue due to faster growth, the increase is insufficient to make up for a projected shortfall in revenue. Hence, the House Plan involves over $5 trillion in tax increases over the next decade.
The most potentially damaging of these increases comes from a major restructuring in how profits are determined. The plan involves a so-called border tax, where profits are taxed based on where companies sell their goods.
The House plan for a border tax would significantly harm certain companies. Companies where imports make up a large percentage of their costs are adversely affected since they would not be allowed to deduct the cost of imports in calculating profits.
The plan would significantly benefit companies with large exports, since revenue from exports would not be counted in calculating profits. On balance, the border tax does more harm than good since the US imports far more than it exports.
The Tax Foundation estimates revenue from the border tax would amount to $1 trillion over 10 years. This type of major change in the calculation of profits threatens to disrupt the supply-chain responsible for all production. President Trump’s initial instinct to label the destination tax as “too complicated” is correct.
Recent comments by White House Press Secretary Sean Spicer suggested the US could impose a 20% tax on Mexican goods. Since this is similar to how imports would be affected by the border tax, newspaper accounts suggest the President might be rethinking his initial opposition to the border tax.
Five trillion dollars in new taxes, particularly the border adjustment tax, creates the potential to offset many of the benefits from the planned tax cuts.
President Trump was one of the few people able to identify the flaw in the 1986 tax act. This time, his instincts are to go for a large tax cuts, combined with cuts in government spending. For the past century, this has been the successful policy combination for restoring growth following periods of economic stagnation.
One early indication of Trump’s success in kick-starting the economy will be his inclination to oppose the disruptive effects from the various tax increases in the GOP plan. The first place to start is with dropping the ill-conceived border tax.
Two days ago the NY Times had a fairly accurate and useful assessment of Trump's appointments. It’s one of the few times he NY Times has mostly been correct in reported on Trump. I say mostly because, unlike the Times, I fail to see the ideological conflict they see. Here is the NY Times report:
The president-elect also said on Saturday that he would nominate Mick Mulvaney, a founding member of the conservative House Freedom Caucus — the group that led the takedown of John A. Boehner as speaker — to be his budget director. “He’s a tremendous talent, especially when it comes to numbers and budgets,” Mr. Trump said in a statement.
In Mr. Mulvaney, Mr. Trump has chosen for the Office of Management and Budget a spending hard-liner to join an economic team that could be ideologically in conflict, setting up possible collisions during major policy-making meetings next year. [Here’s the latest list of Mr. Trump’s top appointments]
Seven men and one woman named by Mr. Trump to run vast government agencies share a common trait: If they are confirmed, their presence would seem intended to unnerve — and maybe even outright undermine — the bureaucracies they are about to lead.
Some of those chosen — 17 picks so far for federal agencies and five for the White House — are among the most radical selections of recent administrations.
It’s important to step back and assess what has happened. Over the past eight years, President Obama has accomplished his main objective—he has transformed America.
Unfortunately, the transformation hasn’t been positive. The country is as divided as it has ever been. There are a number of reasons for the increased divisiveness. One is the economy.
Productivity determines living standards. Historically, US productivity and living standards have increased by 1½% to 2% a year. These increases provided US workers with the highest living standards of any major country in the world.
With massive increases in both spending and regulations, the President and his Party have reduced increases in productivity and living standards. Over the past 4 years, productivity increased by ½% a year. In the past two years, the increase is has been only 0.3% a year.
Unfortunately, productivity tends to increase faster than average during an economic recovery. This suggests the longer-term productivity trend is currently flat to down. The US economy’s growth has been transformed from one of the world’s most dynamic to one of the world’s worst performing economies.
The transition should not have come as a surprise. My book, Rich Nation/Poor Nation describes how this type of transition has occurred every time our country has adopted so-called progressive policies.
With the election of Trump and GOP control of Congress, the first and most important transition will be a return to the rule of law. The Supreme Court majority will no longer rule based on “compassion for the underdog” and “life circumstances.”
While the idea of ruling in favor of the underdog may seem reasonable, it isn’t. Such rulings increase divisiveness and tear a nation apart. Judges are supposed to be impartial.
Imagine the reaction to a referee or umpire who decided to alter the rules to favor a weaker opponent. The end result would be anger, resentment and fights among both participants and their fans. The analogy is just as true for a country as for sports. Rulings based on biases and subjectivity promote lawlessness.
The lack of respect for the rule of law is one of the most destructive forces for any country. The Fraser Institute in Canada describes what has happened in the US:
The expanded use of regulation in the United States has resulted in sharp rating reductions for components such as independence of the judiciary, impartiality of the courts, and regulatory favoritism. To a large degree, the United States has experienced a significant move away from rule of law and toward a highly regulated, politicized, and heavily policed state.
Trump has presented a distinguished list of judges whose backgrounds are consistent with restoring the rule of law.
Trump also campaigned on eliminating many government departments and ending costly regulations. His main opposition in accomplishing these objectives will be professional politicians from both parties.
Trump’s supporters recognized this. The reason Republicans chose him over other potentially safer candidates was a belief Trump was someone strong enough to succeed and “drain the swamp” of special interests in Washington.
In terms of the immediate impact on the economy, little will change. It will take Trump many months to put together the specific programs necessary to accomplish his objectives.
Given his record of success in accomplishing objectives, I believe he will succeed. If he does, the US will not only restore its historical productivity growth, it’s likely to make up for lost time and grow even faster than history would suggest.
None of this will happen immediately. However, if Trump succeeds in reducing tax rates, cutting spending and repealing Obamacare, Dodd-Frank and costly climate-related regulations, we should begin to see some positive movement in the economy by late next year.
As a result, I anticipate the economy will continue to slog along at a growth rate of 2% or less through the first half of next year.
Finally, there is the issue of trade. Trump has talked about tearing up trade agreements and imposing tariffs. He will have to get more specific about just what he intends to accomplish in this area before it will be possible to evaluate his programs.
Given the high quality of his economic advisors, I do not expect there will be a trade war or any significant disruption to trade. However, trade remains a gray area as the main potential chink in Trump’s armor.
Donald Trump may well be the most unusual candidate ever to run for President. Many find his brash, outspoken, undisciplined manner of speaking highly offensive. An eloquent manner of speaking is certainly a desirable quality for a president. However, there are more important skills than an eloquent manner of speech. The most important set of skills are an individual’s ability to assess major issues strategically, reach effective solutions to problems and act decisively to implement appropriate changes. Trump has all of these qualities.
Both political parties agree the main problem with the economy is a failure to generate higher wages. The reason wages have not increased is due to the federal government’s increased control over individuals, businesses and markets. My research shows when these so-called progressive policies have been in effect, the economy and wages have inevitably suffered.
Almost all the increase in take-home pay has occurred during periods when tax rates were declining, when federal spending was slowing and when regulations and controls over businesses and markets were receding. These are the polar opposites of progressive policies.
Trump’s plan to reduce taxes, federal spending and regulatory burdens represents the only viable solution to restoring the growth in real wages. Historically, it’s the same set of policies that enabled the economy to resume growing after previous failed experiments with progressive policies.
Trump on Trade
As with most economists, I believe free trade improves living standards. A lack of barriers to trade among the states has been a key factor in our nation’s prosperity. Extending free trade to other countries further enhances the wealth of all countries.
While Trump has endorsed free trade, he’s perceptive enough to realize free trade is not the most important source of our nation’s prosperity. Destructive tax and regulatory policies have undermined growth and prosperity. This has occurred in spite of a low 11⁄2% average tax on imports. Here are Trump’s thoughts on trade:
Our original Constitution did not even have an income tax. Instead, it had tariffs emphasizing taxation of foreign, not domestic, production. Yet today, 240 years after the Revolution, we’ve turned things completely upside down. We tax and regulate and restrict our companies to death and then we allow foreign countries that cheat to export their goods to us tax-free. How stupid is this?
Trump’s correct. It’s stupid. While free trade promotes prosperity, it cannot help a country that places destructive taxes and regulations on its businesses. Trump clearly sees how the effective path to restoring the nation’s prosperity is to eliminate the nation’s greatest barriers to prosperity.
Trump on Healthcare
Prior to the Affordable Care Act (ACA), I estimated government intervention into our healthcare system made healthcare twice as expensive as it would have been under a free market system. After the ACA healthcare costs have exploded to an estimated $3 trillion a year. Healthcare costs are now roughly three times what they would be in a free-market, competitive environment.
Along with the House Republicans, Trump wants to restore competitive pressures to healthcare. Such moves would lower healthcare costs significantly, truly making healthcare both affordable and available. Moving to a free market in healthcare would save up to $2 trillion a year.
Whether it’s the economy, trade, healthcare or any other issue, Trump sees the big picture and does not get embroiled in minutiae. He sees beyond the immediate consequences of a policy and recognizes the subsequent impact policies can have well into the future. These are precisely the qualities necessary to lead our nation back to prosperity.