Dear blog reader,

Thank you for having been part of the Liberty Bullhorn community! I have truly appreciated your loyal readership, and I hope my writings and podcasts have been valuable and informative. Starting November 29 I am embarking on a new adventure. I am going to join a great, high-quality and growing conservative publication. I will make an update when I start there, but that will also be all. It is going to consume all my time, so this blog will no longer be updated. I will leave it online for the time being, until the domain is up for renewal.

Thank you!

Earlier this week the Bureau of Labor Statistics released its October update of the U.S. terms of trade. This is an obscure little index that economists use in order to measure the value of trade between two jurisdictions. Its actual use is relatively limited, but one of the applications is as an indicator of imported inflation.

Back when America was badly dependent on imported oil, we all know what happened to the gas price as global oil prices increased. The connection still exists between the global market and what we pay at the pump, even though we still benefit to a large degree from our recent gains in energy independence. However, there is more to the oil-price story, namely U.S. exports: we sell a lot of stuff abroad, and at least in theory those exports pay for our imports from that same country.

This is where the “terms of trade” index becomes relevant. It reports the ratio of U.S. exports prices to U.S. imports prices, showing us whether or not the imports from a country are becoming cheaper or more expensive, relative the products we export to them. If

• our exports become more valuable, in other words if buyers in the other country pay more for the products we export to them,
• while we still pay the same price for whatever we import from that country,

then our terms of trade with that country have improved. We are getting their goods relatively more cheaply than before.

The same improvement in terms of trade happens, of course, if import prices fall while our export prices remain unchanged (or increase). The key point here is that an improvement in the terms of trade – a rise in the index number – is an indicator we are not importing inflation, while a drop in the the index number indicates that we are importing inflation.

One of the arguments around our current inflation experience is that it is linked to global supply-chain problems. Specifically, it would somehow be connected to the clog-up of cargo ships off the California coastline, unable to unload imported products from China. For this argument to be valid, we must see a drop in U.S. terms of trade vs. the rest of the world in general and vs. China in particular. Bluntly: if the argument is valid that the global supply chain is causing our inflation, the prices we pay for imports must be rising relative our exports.

Well, as it turns out, that is not what is happening. As Figure 1 reports, our terms of trade with China, Japan and the European Union have improved consistently since the end of last year:

Figure 1

It is important to note that the terms-of-trade calculation only takes account of good trade, not services; inflation imported with services bought from abroad is not taken into account. At the same time, services are only 15 percent of our imports and 30 percent of our exports; the terms-of-trade calculation is still a good gauge of any inflation pressure from abroad.

The three jurisdictions reported in Figure 1 account for 41.6 percent of all our goods imports and receive 29.4 percent of our goods exports. That is a substantial share of our foreign trade, and with our two major trading partners in Asia accounted for, it is safe to say that inflation is not being imported through the clogged-up harbors in California. We get 18.5 percent of our imports from China and 5.4 percent from Japan.

The only major trading partner with which we have seen a deterioration in terms of trade – in other words from which we might be importing inflation – would be Canada. They are substantially less important to us, selling us only 11.8 percent of all the goods we buy from abroad. Therefore, the 11.4-percent decline in our terms of trade with Canada cannot be responsible for more than a marginal share of any of the inflation we are currently experiencing. It is also worth noting that with terms of trade improving with larger trading partners, any inflation imported from Canada would be more than compensated for by the improvement in our real exchange rates with Europe, China and Japan.

The numbers presented here do not tell the whole story about imported inflation, but they tell the large majority of it. Anyone still claiming that our inflation is a supply-chain problem will have to explain how that is possible even as our terms of trade improve with major trading partners, with our industrial capacity utilization being below where it was two years ago and with our workforce being short 5.6 million people before it reaches its 2019 capacity.

No, our inflation is the result of large budget deficits being financed by the Federal Reserve. It’s not more complicated than that.

NO, INFLATION IS NOT A CAPACITY PROBLEM

Here are the numbers to prove it:

The Macro Minute

In yesterday’s article I pointed out that the first and most important question to ask regarding government’s role in our lives in general and in health care in particular, is ideological. There is, I explained,

an overarching issue that deserves our attention first: should, or should not, government be a provider of health care in the first place? This is an ideological question, and as such it seems to suffer from an ill-deserved pariah status in the current public discourse. Yet behind every debate over new government spending lurks a grain of generic opposition to that growth in the burden being placed on taxpayers’ shoulders. It is about time that we bring that debate out in the open and outline the ideological positions on the role of government.

Once we have settled this question with a decision on whether we want no government, a little government or a lot of government involved in health care, we can move on to the practical issues regarding the organization, operation and funding of health care.

These are big issues that, for obvious reasons, cannot be dealt with in a blog article. We can, however, get a good idea of the most important structural aspects of health care by looking at some key statistical information. For starters, it is often claimed that a health-care system run by government is better than one based on private funding and provision of health care. The profit motive, it is sometimes said, distracts resources from providing quality health care.

Criticism of the profit motive is often based on a misunderstanding of what profit actually is. For example, a couple of years ago some political pundits threw an allegation around the internet that Walmart was making a 20-percent profit on its operations. The legal definition of profit – the one that applies in stock-market corporate reporting standards and in corporate tax law – shows Walmart making only three percent profit.

It is entirely possible that critics of the profit motive are such critics of free-market Capitalism that they simply rely on the Marxist definition of profit. If so, the debate is immediately elevated to one regarding economic systems per se, one that I addressed at length in Democracy or Socialism. If for now we keep it more grounded, the question about profit in health care becomes one of how our health care systems are actually organized. This question, in turn, can be divided into two parts:

• Funding, which breaks down to taxes, private insurance or other non-government resources; and
• Operation, in other words the conditions under which health care is provided.

To start with the latter, the arguments here are centered around the role of private hospitals in our health care systems. This debate is now new, but is often based on misinformation or, as mentioned, a skewed idea of what profit means. However, there is a third aspect to this that is surprisingly often ignored, namely the fact that many of our private hospitals are incorporated as non-profit entities.

Just as conventional wisdom leans toward defining all private hospitals as “profit” entities, there is also a tendency to suggest that the provision of health care under single-payer models requires all hospitals to be run by government. Neither is true, and the best example is the U.S. health-care system, which has a mix of all three forms of hospitals. In 2018, 23 percent of all hospitals in this country were public, i.e., run by government; half of them were private non-profit entities and the rest were private for-profit hospitals.

The Netherlands is an interesting counter-example. There are no government-run hospitals in that country, and up to 2008 all hospitals were private non-profit. Since for-profit hospitals were allowed, their share has increased steadily; in 2019 almost four in five hospitals were private for-profit.

Other countries with a large share of for-profit hospitals are Colombia (78 percent), Mexico (70), Italy (56), Greece (53) and Germany (44). The private non-profit model dominates in South Korea, where almost 95 percent of all hospitals are private non-profit entities. The non-profits account for 31 percent of hospitals in Israel and Germany and 24 percent in Portugal.

By contrast, only one country in the OECD database, namely Iceland, reports all its hospitals being in government hands. Slovenia has 90 percent public hospitals, as does Lithuania. Latvia (74 percent), Costa Rica (68) and Estonia (67) also report a high share of government hospitals.

It is worth noting that the Nordic countries do not provide the OECD with appropriate data. However, as country-specific databases would suggest – such as this one for Sweden – there are practically no private hospitals anywhere between Nordkapp and Fehmarn Belt.

Since private provision of medical services is globally accepted, it is odd to notice the continuous push here in America for increased government control over our health-care system. It is particularly interesting to contrast America against the Netherlands: the two countries are moving in the opposite direction with regard to the private-public balance. Not only did the Dutch reform their health-care laws in such a way that most hospitals are now private for-profit entities, but they also decided to drastically reduce government’s role in funding the health care system. In 2006, a reform ended the single-payer model in the Netherlands, replacing it with a system with mandatory, employer-based private insurance.

The current trend in the U.S. system is one of increased government presence in funding health care. In 2018, according to the U.S. Department of Health and Human Services National Health Expenditure database, governments at all levels accounted for 45 percent of all health-care spending. In 1988 that share was less than 31 percent:

Figure 1

This expansion of government funding has come with very little ideological debate. The growth of government funding has essentially been matter-of-factly, rolling out gradually with the occasional leap; the creation of SCHIP – Medicaid for kids – in 1997 is a classical example.

Ironically, the government share of health expenditures seems to have plateaued after the Affordable Care Act was passed in 2010. Since the ACA came with Medicaid expansion and tax-funded subsidies for private insurance, this is a curiosity that can reasonably only be explained by the increased cost of private insurance (since the NHE numbers are reported in current prices).

That said, there is still a weak trend upward in the government share of the NHE, and if the Democrats get what they want in Congress, there will be more to come. As a case in point, on November 16 the Kaiser Family Foundation published a report on the potential costs of the health-care spending items under Build Back Better. Using their account, let us look at two examples to illustrate the point about how ideology affects the configuration, and eventually the cost, of government programs.

Subsidies for insurance plans under the Affordable Care Act

Explains the KFF:

In 2021, the American Rescue Plan Act (ARPA) temporarily expanded eligibility for subsidies by removing the upper income threshold. It also temporarily increased the dollar value of premium subsidies across the board, meaning nearly everyone on the Marketplace paid lower premiums, and the lowest income people pay zero premium for coverage with very low deductibles. The ARPA also made people who received unemployment insurance (UI) benefits during 2021 eligible for zero-premium, low-deductible plans. However, the ARPA provisions removing the upper income threshold and increasing tax credit amounts are only in effect for 2021 and 2022. The unemployment provision is only in effect for 2021. Section 137501 of The Build Back Better Act would extend the ARPA subsidy changes that eliminate the income eligibility cap and increase the amount of APTC for individuals across the board through the end of 2025.

The cost estimate for these measures and a few smaller ones under the same headline, is $20.95 billion per year. In designing the BBBA, the Democrats cut off the ACA-related subsidies and benefits after 2025, but this is just an accounting trick: they needed the entire package to look as if it balances its spending and revenue over a ten-year period. Nobody in his right mind believes that Congress would cut these benefits come January 1, 2026, which means that the subsidy package is now perpetual.

It is worth noting two things about this part of the health measures in the BBBA. First, the annual cost will not remain where it is. No government program ever stays within its predicted cost framework, especially not over such a long period of time as ten years. Historically, health-care costs in general have increased approximately twice as fast as GDP, which is almost entirely due to advancements in medical technology. The product we know as “medical services” is simply getting better and more advanced with time.

Due to a faster-than-GDP increase over time, the services that these subsidies are meant to pay for will simply require higher subsidies in the future. There is nothing in the BBBA that suggests its authors factored in this cost trajectory, nor did the KFF take it into account. Therefore, we can expect these subsidies to cost significantly more going forward.

Secondly, these new ACA-related measures are part of a gradualist expansion of government’s responsibility for funding health care. It would be foolish, frankly, to assume that more of the same will not be coming. With these subsidies a growing share of the population will pay close to nothing for their health insurance, provided of course they enroll under the ACA. This is by design, and the motivation behind this is entirely ideological: government gives a product – health care – by private-insurance proxy to a select group of entitled citizens. The larger this group gets, the closer the entitlement program gets to the point where there are no economic differences between citizens: we all consume the same health care.

Since the underlying motive is ideological, we can expect this ideology to motivate more gradual steps toward the end goal: socialized health care. Therefore, the costs will of course also increase, and increase faster than the BBBA bill suggests.

Lowering Prescription Drug Prices and Spending

The KFF summarizes this feature of the BBBA, which

would allow the federal government to negotiate prices with drug companies for a small number of high-cost drugs lacking generic or biosimilar competitors covered under Medicare Part B and Part D. The negotiation process would apply to no more than 10 (in 2025), 15 (in 2026 and 2027), and 20 (in 2028 and later years) single-source brand-name drugs lacking generic or biosimilar competitors, selected from among the 50 drugs with the highest total Medicare Part D spending and the 50 drugs with the highest total Medicare Part B spending (for 2027 and later years). The negotiation process would also apply to all insulin products.

Again, we are dealing with a gradualist expansion of government’s role in health care. The price-negotiation feature is designed so that it can easily expand over time, and we can safely expect it to do so.

The purpose behind these negotiations is to manage the cost of health care, but not by means of a free market. This cost management feature is instead based on a central-planning model where government uses its bulk-buying power as leverage vs. the pharmaceutical companies. While this sounds attractive – people will get good medical drugs at a cost affordable to taxpayers – in reality the measure has limited latitude to do what it is designed to do. The development costs for a pharmaceutical product is what it is: beyond small adjustments, any price pressure from government will erode quality and ultimately lead to a slowdown of, or even end to, the supply of new, high-quality medicines.

If price negotiation were an isolated phenomenon, there would not be much reason to discuss it. But since the expansion of government in health care under the BBBA is motivated by a gradualist approach to an ideological end goal, it is not to be read as an isolated phenomenon. Instead, it is a feature of government’s presence in health care that we have to account for on the same terms as the expansion of the ACA subsidies: they will apply more broadly over time. Therefore, we can expect them to gradually restrict the supply of medicine, first to select, entitled groups of citizens, then – over time – gradually toward covering all Americans.

The consequence will not be a drive-up in cost as much as a lowering of quality. This phenomenon is already visible in single-payer countries, where access to medical drugs is restrictive, in some cases even non-existent. As the quality of and access to medicine are worsened under price controls, medical procedures – especially more complex ones – become less effective. This has negative consequences for patients, and in the end increases demand on the health care system as people, who are not fully cured or even remain with unchanged health conditions, demand help to cope with their situation.

Again, this is not a hypothetical scenario. As I explained in Remaking America already in 2010, this is very much how a single-payer system functions. By importing more and more elements from it, we also import its effects on the health-care system.

As for the alleged savings from price controls, listed in the KFF article: once the price controls start affecting the supply of pharmaceutical products, the cost savings will translate into a lowering of the quality of health care. This means, plainly, that the savings are not savings, but traditional, fiscal austerity measures. Think of it as negotiating the 2019 price for a new car of the 2021 model year, then being delivered a 2019 car instead of the new one.

Again, these are only two examples of how government is expanding its presence in American health care, and how this expansion is ideologically motivated. The fact that they can pass through the legislative process with relative ease, and there is virtually no attention being given to them – especially not from the viewpoint of an ideological analysis – tells us a great deal about how desperately we need to have a principles conversation in our country about the role of government. That conversation should start with the health care system, but not end until it has exhausted all of the 70 percent of the federal budget that is designed to advance one particular ideology.

Treasury interest rates are rising again. The reason is sadly predictable:

The Macro Minute

The Build Back Better behemoth of a spending package has reignited the debate about more government spending on health care. Some of the things that are in the BBB “social-spending plan”:

A proposal to allow Medicare to negotiate drug prices for certain higher-cost drugs that lack competition

Subsidies through the Affordable Care Act to make coverage more affordable through 2025 and the expansion of Medicaid coverage for those living in states that opted against expansion

Developing new state Medicaid requirements to guarantee coverage for more vulnerable patients, including 12 months of continuous Medicaid and CHIP eligibility to postpartum women

Transparency measures for pharmacy benefit managers

Chris Holt from American Action Forum adds more details:

The BBBA expands who is eligible for Affordable Care Act premium tax credits (PTCs) and makes those PTCs more generous for everyone. According to the American Action Forum’s (AAF) Center for Health and Economy, these policies would increase the number of insured individuals by 2.2 million in 2022, increasing to 3.9 million in 2025 relative to current law, and would cost $272 billion over those four years. The coverage gains would, however, evaporate in 2026 without further congressional action. In a series of last-minute negotiations, Democrats added a number of policies aimed at reducing prescription drug spending to the BBBA legislation. Significantly, the BBBA would allow the Secretary of Health and Human Services to directly negotiate what Medicare pays for drugs for the first time. The details of the proposal make it abundantly clear, however, that this negotiation will amount to little more than government price-fixing.The BBBA includes long-sought reforms to the Medicare prescription drug benefit—originally put forward by AAF in 2018—aimed at realigning insurer and drugmaker incentives to hold down Part D costs, and capping Part D beneficiaries’ out-of-pocket spending on drugs.

The cost figures that Holt mentions are on the low end, for a number of reasons that I will return to in a separate article. Before we analyze just how costly these measures will be, there is an overarching issue that deserves our attention first: should, or should not, government be a provider of health care in the first place?

This is an ideological question, and as such it seems to suffer from an ill-deserved pariah status in the current public discourse. Yet behind every debate over new government spending lurks a grain of generic opposition to that growth in the burden being placed on taxpayers’ shoulders. It is about time that we bring that debate out in the open and outline the ideological positions on the role of government.

If we start from the right, so to speak, the first ideological position is the libertarian one. Perhaps better known as “classical liberalism”, this ideology traces its roots back to John Locke and the thoughts on the tension between the state and the individual that emerged from the Renaissance and the Enlightenment eras. More recent thinkers – J S Mill and Robert Nozick to mention only two – have added a significant body of thought, inspiring especially the American strain of classical liberalism.

At the heart of libertarian political theory is the postulate that the individual is absolutely inviolable. This inviolability includes the individual’s property – morally defined as extensions of his labor – which leads to the conclusion that there are no moral reasons why anyone can take any property by force. This includes government.

By absolutely excluding taxes, libertarian political theory a priori nullifies any attempt at creating a government-run health care system. But there is also another side to the libertarian argument, namely the restrictions that a government-run system places on the choices that the individual can make. When government provides health care, it also decides when health care is provided, what care patients can receive, and – an often forgotten flip-side of that coin – what care patients can not receive.

This power over a person’s needs is as much a violation of his individual freedom as the power to tax him. Therefore, libertarian political theory absolutely rejects the notion of government-run health care.

Next up is the conservative ideological argument. Resting on different scholarly grounds, conservatism nevertheless shares the libertarian affinity for individual and economic freedom. While there is a wide range of conservative thought to take into account, their common denominator is one that places the individual in a social and cultural context. Where classical liberals (in telegraphic short-form) see the individual as an absolutely independent entity, conservatives emphasize that there is a context without which an individual will not be fostered into a virtuous, responsible citizen.

In common parlance, the conservative strain that places the most emphasis on the context is that which often places a “social” prefix on the ideology. In policy practice, social conservatism has a heritage to draw on that stretches back to the Elizabethan poor laws, but its more recent iterations were shown in the British Beveridge Report on how to build a conservative welfare state, and the expansion of government entitlement programs under President Franklin Roosevelt.

Neither example included a socialized health care system, for one good reason: entitlements are designed as last-resort solutions to financial hardship, not a means to economic redistribution. For the exact meaning of the difference, see my book Democracy or Socialism (Palgrave McMillan 2021). This last-resort approach is motivated by the idea that the individual belongs in a context where it is the state’s responsibility to provide for a virtuous social and cultural society. That role squarely excludes a government-run health-care system, as such a system would monopolize an entire industry, thereby annihilating the ability of the individual to exercise responsible citizenship over his own health care needs.

Furthermore, when government monopolizes health care, it does so based on a specific idea of how health-care resources ought to be distributed. There is no point in having government monopolize health care and then just let health care be provided according to the same pattern as would have been the case, had government not monopolized the industry. In short: socialized health care serves the purpose of economic redistribution, which is the core purpose of socialism.

Which brings us to the third ideology. A socialist logically argues for a government monopoly on health care because he believes that medical services ought to be provided according to different criteria than those under which the free market operates. The socialist has a general desire to focus government resources on the provision for needs, not wants, a focus that originates in its Marxist economic theory and can be traced back to the labor theory of value. (Again, see my book per link above.) This theory explicates a diametrically opposite view of the distribution of goods and services than does free-market capitalism: all resources in society must be focused on providing the very same basic goods and services to everyone, regardless of their individual characteristics – or efforts to add value to the economy.

This superficially appealing principle means, in reality, that government not only should, but must seize control over and responsibility for the provision of every citizen’s needs. From a central plan, necessitated by Marxist economic theory, emerges the production and distribution of the same basic goods and services for everyone; in terms of health care, government takes absolute control over every aspect of it. A patient in need of dental surgery cannot choose when, where or by whom the procedure should be provided; a patient whose hip is damaged to the point of needing replacement, cannot choose what prosthetic hip to get, nor the surgeon, nor the hospital.

In deciding how to provide health-care resources, government also has to prioritize how to allocate its scarce resources. It applies criteria that quantify the outcomes of, e.g., elective surgery, weighing who will get each procedure based on if the patient will be productive enough after recovery. Under a more prosaic socialist health-care system, such as the ones currently in use in many European countries, the “productive” criteria zero in on expected tax revenue from the person’s remaining years in the workforce. Under a more rigid system, such as those that were in operation in Eastern Europe under the Soviet Empire, the patient’s productivity is directly related to the labor value he will add after returning to work.

Either way, the government’s decision on how to allocate health-care resources will always be independent of the patient’s preferences. A patient may claim that he will benefit a great deal from a specific elective-surgery procedure; if government does not value his regained health as much as he does, and if government decides that another patient will generate more value, the other patient is given the procedure instead.

Where government controls health care, it controls all the criteria based on which health care is provided. The patient is excluded from the decision process.

This is, for sure, a very short account of the ideological approaches to the question about government and health care. However, it is not meant to provide an exhaustive analysis of exactly how government can participate – if at all – in the funding, production and allocation of medical services. It is means, rather, to point to the need for a principled conversation about what role government really should play on our society.

Tomorrow we will dig into health-care statistics and see whether or not it is the case that socialized systems really are better than the kind of hybrid model we have in America.