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Health care: Life and death and substance

August 28th, 2009 by Craig Westover

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It’s unfortunate that some opponents of federal government-directed health care jumped on the ‘Death Panel’ metaphor instead of the substance of the proposed legislation. Whether the federal legislation intends it or not, a government-directed plan necessarily requires bureaucrats to make life and death decisions that are more far-reaching and more complex than the hyperbolic ‘pulling the plug on grandma.’

No matter how wealthy we are as a nation, the government will never be able to provide health care for all AND provide all of the health care everyone would want. Trade-offs are inevitable; if universal access is a given, then the amount and quality of delivered medical treatment must necessarily be negotiable.

To understand the complexity and God-like power the feds are proposing to invest in some poor civil servants, let’s allow grandma to peacefully nap and consider the other end of the life spectrum, infant mortality. Imagine yourself charged with managing the cost of care for newborn infants under the government program. Here’s the situation you would face.

The U.S. has an infant mortality rate of approximately 7 deaths per 1,000 live births, compared with 5 deaths in other developed countries; in Norway, infant mortality is a mere 4.1. Race, geography, income and education all factor into those numbers, but irrespective of its genesis, low birth weight is a primary factor in infant mortality.

Low birth weight occurs in about 7 percent to 8 percent of all live births, but 40 percent to 70 percent of all infant deaths can be attributed to low birth weight (depending on how one defines “low”). When compared to normal weight infants (more than 5.5 lbs), infants with “moderate” (less than 5.5 lbs), “very low” (less than 3.3 lbs) and “extremely low” (less than 2.2 lbs) birth weights have 40, 200 and 600 times greater risk than normal weight infants, respectively.

According to the journal “Pediatrics,” 8 percent of 4.6 million infant hospital stays (2001 data) included a preterm/low-birth-weight diagnosis, accounting for 47 percent of the costs for all hospitalizations ($5.8 billion) and 27 percent of all pediatric stays. The average cost of the hospital stay (12.9 days) was $15,100 compared with $600 (1.9 days) for uncomplicated births. For infants less than 2.2 lbs, the average cost of hospitalization was $65,600.

Advances in medical technology have significantly improved the survival chances of infants with extremely low birth weights (without complications), but at a high cost. Complications, however, are common in infants with low birth weights, often requiring intensive, expensive care; still, the mortality rates remain relatively high.

What do you do? Here’s more data.

A study by the Rand Corporation found that 69 percent of infants who die during their initial hospital stay did so within one day of birth. Those infants were the least expensive to treat, an average of $6,310. For infants who died during the remainder of their initial hospitalization, average treatment was $58,800. Infants at “extremely low” birth weights, in aggregate, create the most costs; technology keeps them alive past the first day, but despite the extra effort and added cost, infants born weighing less than 2.2 lbs have the lowest initial hospitalization survival rate.

More data to consider: The aggregate annual incremental costs among low-birth-weight children ages birth to 15 have been estimated at $5.4 billion per year, not including long-term care, special services and special education often correlated with low-birth-weight children. All that said, remember, those are aggregate statistics; many low-birth-weight children grow into healthy, happy adults with no unusual health problems – you just don’t know who they will be.

So, were you tasked with managing the public newborn-care option, what would you do? Should the public health plan allow spending billions of tax dollars on technology and treatment attempting to save low-birth-weight infants when that practice has a high probability of complications yielding a relatively low survival rate with a high probability of ongoing medical and other expenses associated with survival?

Access, quality and cost — you cannot reduce costs if your promise is equal effort for every low-birth-weight child using whatever technology and treatment is available. In Switzerland, a country often cited for a lower infant mortality rate than the United States, infants weighing less than 2.2 lbs. at birth who die are designated stillborn, whether measures are taken to help them survive or not. Problem solved?

Infant mortality highlights the underlying question of the health care reform debate: How can individuals deal with unpredictable, unaffordable expenses? Neither the regulated, privately managed care approach we have today nor the government-run managed care proposals being debated in Congress provide an acceptable answer. A free market system where patients control the money, health care providers set prices for services, and private insurers are free to develop policies that convert unpredictable and unaffordable events into affordable and predictable premiums, could well be the best way to optimize (not perfect) health care resources.

Unfortunately, in the progressive rush to birth a government-run solution, the free-market solution is designated “stillborn.”

This commentary originally appeared in the St. Paul Pioneer Press, Friday August 28.

Photo Caption: Neonatalogist Jonathan Muraskas places his hand next to Rumaisa Rahman, known to be the smallest baby in the world to survive birth (8.6 ounces). Rumaisa was born at Loyola University Medical Centre in Chicago. Photo: Reuters

Posted in Blog Posts, Commentaries, Craig Westover, Health Care, Limited Government | No Comments »

DFL spins tax talk away from the real issues — tradeoffs and reform

July 15th, 2009 by Craig Westover

Sertich and Keliher The headline in the Pioneer Press seemed to tell the story: ‘DFL budget plan would have cost fewer jobs, state economist says.’

Indeed, before the Legislative Advisory Commission, state economist Tom Stinson estimated Gov. Tim Pawlenty’s spending cuts will cost Minnesota 3,000 to 4,700 jobs. He also modeled the impact of a tax increase on job loss. The Pioneer Press reported “the $1 billion income tax increase that the Democratic-controlled Legislature passed and Pawlenty vetoed in May would have cost the state an estimated 1,000 jobs over the next two years.”

Unfortunately, in eagerness to report or spin Stinson’s numbers, the press, progressive think tanks and DFL legislators misunderstood the purpose of Stinson’s work and didn’t get the basic story straight. In the measured terms of a professional, Stinson confirmed to me that the coverage of his testimony was “not entirely accurate” and interpretation of his data was somewhat “simplistic.”

His job as an economist is not to make political or policy judgments, Stinson said, but to provide a common basis of information and understanding from which better political and policy judgments can be made.

I fear he misreads the motivation of the DFL-dominated commission.

When House Majority Leader Tony Sertich, DFL-Chisholm, declares that “Governor Pawlenty’s budget proposal is going to cause three to five times as many job losses in the state as the legislative proposal,” he is “not entirely accurate” and “simplistic.” In his eagerness to exploit Stinson’s data, he misses larger policy implications. And that is the problem.

First, Stinson’s research did not analyze the DFL bill vetoed by the governor (as reported and repeated). The vetoed bill included income tax increases and pass-through tax increases on credit card companies and on alcohol products. Stinson was asked to evaluate the governor’s unallotments in terms of job loss. A professional, he also modeled a hypothetical $1 billion income tax increase (over two years) because he was “trying to make sure people understood that there are no easy answers.”

In other words, Stinson came not to praise or bury Pawlenty. Short-term job loss is one data point among many trade-offs inherent in the budgeting process, but it is not the only trade-off. In fact, the trade-off between tax increases and spending cuts results from a higher-level trade-off — between a balanced budget and making a recession worse.

Progressive think tanks often quote Nobel laureate and Columbia University professor Joseph Stiglitz saying that a reduction in government spending is more harmful to the economy in the short run than an increase in taxes. What they fail to note (but Stiglitz emphasizes) is the balanced-budget trade-off that puts policy-makers in a situation that is ultimately harmful to the economy.

“It is worth emphasizing,” Stiglitz writes, “that any state spending reductions or tax increases are counterproductive at this time: they restrain the economy at time when it is already slowing.”

So, let’s be honest: The debate over tax increases or spending cuts is not about improving the state’s economy. The choice is not between “good and bad” or “better and worse”; the choice is between “bad and worse.”

Stinson’s model does not make value judgments about how the loss of specific job types affects the state economy. Nor does it consider the value of freeing unproductive resources for other uses, nor does it provide any criteria for making those judgments. Those are among the political and policy questions that must be addressed on a case-by-case basis, which won’t happen while the Legislative Advisory Committee remains intent on misusing data to beat up the governor.

The legislative end game is neither “stupid” DFL tax increases nor “evil” GOP spending cuts (nor some really stupid and evil “bipartisan” combination); the end game is enabling Minnesota to be a competitive player in the global competition for the capital that creates productive jobs in the private sector. To correct that problem requires reform of the tax system and a redefinition of the role of government, and that won’t happen if the Legislative Advisory Council stubbornly continues turning data points into talking points, which makes for provocative newspaper headlines but precious little progress.

Craig Westover is a contributing columnist to the Pioneer Press Opinion Page, a senior policy fellow at the Minnesota Free Market Institute (mnfmi.org) and a member of the Republican Party Liberty Caucus. His e-mail address is westover4@yahoo.com.

This commentary originally appeared in the St. Paul Pioneer Press July 15, 2009.

Posted in Blog Posts, Commentaries, Craig Westover, Tax Policy | 1 Comment »

Single-Payer Model Actually Inhibits Improved Health Care

June 25th, 2009 by Craig Westover

There is one point about a single-payer health-care system on which Dr. Oliver Fein and I agree — there’s not enough of a definition for the public to make an assessment about what a single-payer health-care system really is. In a recent MinnPost piece ["Medicare 2.0: Doctors group urges health care for all," by Casey Selix], Fein, president of Physicians for a National Health Care Program, provides a set of six principles that “really define what single-payer is.” Indeed they do. But when one examines logically the six principles Fein lays out, one realizes that as well-intentioned as is his desire for universal health care, the single-payer model can’t get us there, it actually inhibits improved health care — and, ironically, to establish a manufactured “right” to health care a single-payer system destroys the unalienable right of individuals to make their own health-care decisions.

Let’s look at Fein’s principles in detail, contrasting them with a free-market health-care system, keeping in mind that the health care system we have today is NOT a free-market system but a heavily regulated managed-care system — single-payer-lite.

Fein’s principles Nos. 1, 2 and 3 define the classic trade-off among access, quality, cost. His first principle of a single-payer system is “automatic enrollment, which would lead to universal coverage.” His second principle is that “benefits ought to be really comprehensive … going from prevention, doctor, hospital, pharmaceuticals, to dental, metal health — all medically necessary services.” Principle three is that “these things should be publically financed.”

Every system — whether a manufacturing system, a sales system, the education system or the health care system — has the same three (and only three) outputs and addresses the same three questions: “How many of what kind at what cost? In health care, those three questions are expressed, “What quality of care (kind) can we provide at what cost to how many people?” Trade-offs are necessary to achieve the optimum (not perfect) system.

In a free-market health-care system, the optimum solution is determined by the pricing mechanism and individual choice. Each of the three variables is truly variable — that is given a market where physicians determine service and price and the individual is responsible for his care costs, a person might choose to have his annual check-up done by a local clinic rather than the Mayo Clinic. Given his family history, his doctor might decide he needs a specific procedure at a different interval than “the average patient.” It is these kinds of individual decisions made by millions of individuals that create an optimum health care system.

‘Variables’ aren’t variable
In Fein’s single-payer model, the “variables” are not variable at all. One of the three variables is fixed (universal coverage); consequently, the other two must be consciously managed from outside the system. Everyone cannot receive comprehensive health care (however “comprehensive” is defined) except at very high cost (or with very high taxes). If costs are fixed (as they must be at some level) then all that remains to be managed is the definition of “comprehensive.” That is why the Obama health plan calls for creation of a third-party board to determine the cost-effectiveness of specific medical treatment for specific classes of people and decide if the treatment will be covered. “Comprehensive” medical care means “quality” medical care is what government says it is, not necessarily what the patient wants.

Whereas in a free-market system millions of medical decisions are made with immediate cost and quality information available to doctors and patients, in a single-payer system, health-care decisions are governed by a relative few individuals necessarily making aggregate assumptions about individual patient situations because they cannot possibly have instant access to data required to make a decision about any individual patient.

That would be “you.”

Trade-offs among access, quality and cost in a health-care system are inevitable even if Fein does not acknowledge them. In a single-payer system with universal coverage, at some point, someone other than you and your doctor will be making decisions that materially dictate and limit treatment options available to you and your family.

Fein’s principle No. 4 is that single-payer eliminates “administrative waste” that results from having multiple payers. His principle No. 5 is that single-payer maximizes choice compared to “our present private insurance system.” Before we can discuss those two principles it is necessary to debunk the misconception Fein implies — that our “present private insurance system” is equivalent to “free-market health care” and that the present managed-care system is the same as a “private health insurance system.”

In free market, patients control the money
In a free-market health-care system, patients control the money that is spent on their health care. That money might be theirs, it might come from an insurance settlement, it might be a health-care voucher by a government program, but in each case, the patient decides how his money will be spent. In turn, in a free-market system, doctors determine what services they will provide and at what price. Doctors compete for individual patients on price and quality of care. Finally, in a free-market health-care system, insurance companies offer policies that meet the differing resources and tolerance for risk of individual consumers. They also have control of products and price. Insurance companies compete for customers based on price and comprehensiveness of coverage.

True health insurance (as opposed to prepaid medical care) has little to do with access to actual medical treatment. Health insurance, like any other insurance product, is concerned with asset protection. The purpose of health insurance is turning unpredictable and unaffordable expense into predictable, affordable expense. Insurance companies offer a variety of policies at different premium levels and deductibles that consumers will buy depending on their needs, resources and tolerance for risk.

In today’s prepaid managed-care system, insurance companies control (via government regulation) which services will be covered and how much physicians will be paid for those services. Even Fein acknowledges that in today’s regulated environment consumer choices are limited. Because a single entity controls both demand and supply of health care, there is no competitive pricing mechanism and consequently no accurate regulator on prices. Cost can’t be controlled if there is no mechanism for determining price and demand at a price.

Three outputs, three questions
Recall that any system has the same three outputs and addresses the same three questions — “How many of what kind at what cost? In a private health-insurance system, those three questions are expressed as “How many policies can be written, covering which situations at what cost?” In the current system, by law, “covering what situation” is mandated. Minnesota has more than 60 insurance mandates requiring specific coverage, for example. When one variable is fixed, the other two must be consciously managed from outside the system. Hence, on top of necessary administrative costs, we get unnecessary administrative costs imposed by regulation.

Because a third party, government, has fixed the extent of coverage, private companies are limited as to the policies they can provide and the price at which they can provide them. To keep costs down, they must either limit service provided or reduce payments to service providers. That does not change with the advent of a single-payer system. A single-payer system is not essentially different from the managed-care system we have today. The only difference is eliminating the regulated private health-care insurers and replacing them with a regimented bureaucracy.

That brings us back to Fein’s single-payer health care principles Nos. 4 and 5: eliminating administrative waste and maximizing choice.

I’ll forgo arguing with Fein’s statistics on administration costs other than to say determining administrative cost depends a lot on what is included as “administration” and what isn’t, and Fein’s numbers are based on some fairly biased assumptions — as would be my assumptions to the contrary. However, the fundamental irony, as the Cato Institute’s Michael Tanner points out, is that folks like Fein praise one of the greatest failings of socialized medicine, lack of administration, as if it were a virtue.

Administration is key
Economist Tyler Cowen notes administrative costs like monitoring, marketing and overhead costs of private insurance companies are what enable those companies to offer coverage for expensive medical treatments. Competing insurance companies spend money evaluating claims and setting pricing structures so that there is an accurate measure of what coverage actually costs relative to need. Without that review mechanism, it is impossible to limit health-care costs without reducing service. Without the consulting function of insurance agents, individuals will either buy more coverage than they need and pay more for it than they should, or find themselves underinsured and taking on more financial risk than warranted.

Tanner adds, “If European health-care systems appear to have lower administrative costs, it is because, rather than scrutinizing claims, they limit the overall amount they will spend on medical services. Of course, that just means they shift costs to patients who either must pay for medical services themselves, or deal with the costs of waiting.” Going back to the access, quality, cost triumvirate, if claims are not reviewed then cost must be shifted or care limited, or “administrative saving” or the consequences of lax oversight must be passed to taxpayers.

In his principle No. 5, as he did with the definition of “comprehensive,” Fein obscures the concept of “choice” in health care. “The program in the country with the most choice is Medicare,” he writes. “You have the choice of physician, a choice of hospital; so, again, single payer would lead to increased choice.”

Indeed, as Fein envisions single-payer, it would lead to increased choice compared to today’s system. But remember, the system we have today is not a free market system, which by definition requires that patients control their health care dollars and choose their own physicians and by extension hospitals and other treatment facilities. The system we have today, thanks to government regulation, is a managed care system where different costs for “in-network” and “out-of-network” care are unavoidable because doctors are competing for pools of patients provided by health plans based on how little reimbursement they will take; doctors are not competing for patients based on value to the patient.

However, what Fein calls “choice” turns out to be anything but, as his principle No. 6 illustrates.

In his sixth principle, Fein again tries to reassure with the idea that a single-payer system really delivers health care through a “nonprofit, privately controlled system.” Doctors, he says, “would not be employed by the government; hospitals would not be owned by the government. What you would have is public financing and collection of money by the single payer, but the private delivery system would continue.”

Sort of like General Motors, I guess.

Choice, but not much of a choice
What Fein doesn’t make clear is that while patients in a single-payer system might choose from among private doctors and private hospitals, there will be little difference among doctors and hospitals in the procedures and treatments they are allowed to perform. There is a big difference between choosing among McDonald’s, Burger King and Subway (a free market) and “choosing” any (but only) McDonald’s. Again, in a single-payer system at some level, medical choices for the individual must be made by a third party based on aggregate rather than individual considerations — you just can’t get “a flame-broil Whopper Jr. for a buck” at Subway.

A second point Fein ignores in his choice argument is that with a single-payer system there is little to no motivation to innovate. Using Fein’s Medicare analogy, the single-payer determines both service descriptions and reimbursement rates. Innovations, by the definition of “innovation,” are not in the system. Medical innovations by their nature are, in initial stages, very expensive, and until perfected, produce unpredictable results. Where is the motivation to innovate if a) one must buck the system at one’s own expense to put the procedure on the service schedule, and b) one will be able to price the innovation to compensate for developing it.

Removing the profit motive stifles innovation; that reduces choice, it does not increase it.

Concluding, Fein provides us with the single-payer analogy of Medicare for all. “So what we talk about is Medicare 2.0,” he writes, “an expanded program of Medicare for all and an improved program that deals with many of these other programs. That would be the way a single-payer program would operate in the United States.”

OK, let’s assume Medicare provides “comprehensive” medical care at affordable cost (a debatable point). Why is that so? It is because the private health-care market picks up the tab for subsidized, below-market Medicare patient care; non-Medicare patients pay much more for the same services. When you extend Medicare to everyone, who is left to pick up the slack?

The dirty little secret today is that increasing numbers of physicians are simply not taking new Medicare patients. They continue to provide care as their patients age into Medicare, but the reimbursement rates for Medicare are so low that private physicians simply cannot afford to take on new Medicare patients. We’re not talking the ever-available criticism of “greed.” We are talking government reimbursements that are so low that they do not cover the cost of treatment and overhead, let alone any expectation of profit.

This situation points out another consequence of a single-payer system that Fein ignores: A Medicare-for-all scenario necessarily requires a nonvoluntary requirement on physicians to provide care irrespective of their own interests. The individual sovereignty of health-care providers, an unalienable right, must be sacrificed for the manufactured “right to health care.” As must the patient’s unalienable right to make his own health-care decisions.

Trade-offs would be imposed from on high
In his MinnPost interview, Fein has given us a clear picture of a single-payer system. What he has not offered is the trade-offs such a system must necessarily impose from on high by boards and bureaucrats, unlike in a free-market health care system where trade-offs are determined by individuals and their doctors. A single-payer system is a classic example of the dichotomy between freedom and perfection: A free society can never be perfect; a perfect society can never be free. The ultimate trade-off offered by a single-payment health care system is between the unfulfillable promise of perfection and the frustration of imperfection engendered by individual freedom.

In a true free-market system, not the heavily regulated managed-care health-care system we have today, individuals and their doctors decide how trade-offs will be made based on their individual situations. In a single-payer system, third-party government boards must necessarily make cost-based decisions about individual medical care based only on aggregate data. A free-market health-care system encourages innovation because innovators reap the rewards of their effort; a single-payer system discourages innovation because the system doesn’t know how to value innovation. A free-market health-care system establishes an optimum (not perfect) relationship among access, quality and cost; a single-payer system providing universal coverage distorts market signals by the necessity to system control costs, and consequently misallocates costs and redefines “quality.”

Ultimately the question that the public must answer vis-à-vis single payer health care is “Who do you want making decisions about health care for you and your family — you and your doctor, or somebody else?

Craig Westover, a senior policy fellow with the Minnesota Free Market Institute, is a contributing columnist to the Pioneer Press Opinion Page and a contributor to MinnPost.

This piece originally appeared at MinnPost.Com — COMMUNITY VOICES | THU, JUN 25 2009 7:00 AM

Posted in Blog Posts, Commentaries, Craig Westover, Health Care | 4 Comments »

Interest-Group liberalism — Root, Root, Root for the Home Team

May 28th, 2009 by Craig Westover

Weary of watching the Twins’ futility in the home of those damn Yankees last week, I looked for a winner on my bookshelf. I seized upon the optimistically titled ‘The End of Liberalism.’ Although its predictive value is somewhat depreciated by its 1969 copyright, the classic text by political scientist Theodore Lowi is as insightful today as in the heyday of ‘The Great Society.’

Lowi coined the term “interest-group liberalism” to describe policy-making through deference to organized lobbies. Interest-group liberalism rests on two fundamental beliefs: Government is a positive force and a champion of good, and virtually all interest-group demands are legitimate. Consequently, a primary function of government becomes balancing and advancing any and all organized petitions.

The “end of liberalism” comes about when the appeasement process evolves the perfect storm of unrestrained bureaucratic growth, an unmanageable web of conflicting regulations and an unsustainable skyrocketing budget. Are we there yet, at the end?

Not by a long shot, and the reason is simple: Interest-group liberalism is the prevailing political philosophy of the American public, of Democrats and of Republicans — all the post-election Republican talk of a return to “conservative values” and “conservative principles” notwithstanding.

Slate writer Jacob Weisberg picked up on Lowi’s theme in a 2005 piece analyzing the governing philosophy of then President George Bush. When Democrats were in power, Weisberg noted, they were beholden to unions, lobbies for women’s rights, civil rights and gay rights, senior citizens lobbies, welfare advocates, Hollywood and trial lawyers. The hallmark of Democratic governing was a focus on policies that meant more to those groups than mattered to the welfare of the country at large.

When Republicans assumed power in 2000, the implied promise was the end of liberalism. Instead, Bush-era Republicans practiced their own brand of interest-group liberalism. Out with the old and in with military contractors, evangelical Christians, wealthy investors, gun owners and an alternative conservative media — new regime, new supplicants, but the same process.

Like the repentant weight-watcher who will do whatever it takes to slim down except diet and exercise, after getting hammered in the past two election cycles Republicans seem willing to do whatever it takes to restore conservative “values” — except adhere to conservative “principles.” Consider the touting by Republican Rep. Erik Paulsen of a legislative amendment he authored.

“Our military veterans who own businesses face unique challenges, and government must ensure the policies in place to assist them are achieving their goals,” Paulsen said in a press release. The “Job Creation through Entrepreneurship Act,” to which Paulsen’s amendment ensuring benefits for veterans was attached, also includes specific largess for women, Native Americans and a new grant program for Small Business Development Centers. It passed the House 406-15.

Paulsen and Republican Rep. John Kline voting for a bill that champions small business and veterans is certainly in keeping with “conservative values” (GOP Rep. Michele Bachmann did not vote). But using public funds to create private benefits for multiple interest groups by expanding the federal bureaucracy and deficit spending most certainly violates the conservative principles of limited government and fiscal responsibility (not to mention constitutional fidelity).

Such interest-group liberalism turns logrolling (legislators trading votes) from “a necessary evil into a virtue.” So at a state level, when southern Minnesota legislators earmark state funds for an international volleyball center in Rochester, there is nary a peep from their Arrowhead compatriots who expect reciprocal support in anticipation of a photo-op at a Duluth arena expansion. Both outstate areas support a budget-draining light-rail system between Minneapolis and St. Paul. A combined financial obligation on all Minnesotans, these projects respectively mean more to Rochester, Duluth and the Twin Cities than they matter to the welfare of the state at large.

The irony is that by practicing interest-group liberalism, both Democrats and Republicans are conservatively protecting an unsustainable status quo. Chances of actual reform — say, replacing the inefficient corporate income tax with a more efficient broad-based, low-rate sales tax — is problematic, not because of any flaw in economic logic, but because Democrats and Republicans both have supporters threatened by the reform. Their here-and-now concerns matter more, politically, than the future economic welfare of the state.

While many are outraged at government largess to interest groups other than their own, few are eager to gore their own oxen for the sake of principle. Nonetheless, unless we the people demand reform, it’s more likely the Twins will sweep a series in Yankee Stadium than we will ever achieve an “end of liberalism.”

This commentary originally appeared in the St. Paul Pioneer Press Thursday, May 28, 2009.

Posted in Blog Posts, Commentaries, Craig Westover, Limited Government, Tax Policy | 2 Comments »

Craig Westover: Sunday morning sound bites vs. an honest debate

April 24th, 2009 by Craig Westover

I just heard the sound bite again on a Sunday morning talk show: “The wealthiest Minnesotans pay only 9 percent of their income in state and local taxes while middle-income wage-earners pay 12 percent.”

Those numbers are accurate. They come right out of the Minnesota Tax Incidence Study, a biennial report of who pays how much in state and local taxes. And the Minnesota report even earns the kudos of center-right economists for its intellectual rigor and clear statement of assumptions and limits — a rigor and integrity lacking, however, when tax burden percentages are tossed out as disembodied “facts.”

Among many relevant but ignored economic issues affecting interpretation of the Tax Incidence Study, three stand out.

First, the Tax Incidence Study is a snapshot of income distribution at a specific point in time and does not consider the significant changes in income that occur over a person’s lifetime. Consequently, the study implies more income inequality than is reality over a person’s working life.

A report provided by the U.S. Treasury Department found that more than 50 percent of taxpayers were in a different tax bracket (higher or lower) at the end of a 10-year study period than at its beginning. Although an insignificant percentage in the lowest tax bracket made it to the top bracket in just 10 years, only 33 percent remained in the lowest bracket — and 32 percent elevated themselves to the 15 percent tax bracket.

Likewise, a small percentage of those who in Year 1 were in the 28 percent tax bracket and above dropped to the lowest income levels. However, after 10 years, a significant percentage of once upper-income earners were in the 25 percent, or middle income, tax bracket. Over the 10-year timeframe, income levels trended toward the middle-income tax brackets.

Discounting income mobility ignores the impact of taxes on the ability of people to both pay back debt they incurred in low-income-earning years and save for later, low-income-earning years. Legislating people into a higher tax bracket punishes education, saving and upward mobility.

Take the case (reported by Yahoo News) of Van Moore, who graduated from optometry school $150,000 in debt. His first job brought in less than $20,000 a year. Then he made $50,000 for several years, all the while paying on his student loan, which still carries a balance. Now he is making just above $250,000, the arbitrary dividing line between “the rich” and the rest of us. A higher tax penalizes Moore for borrowing money in his low-income years to educate himself so he could earn more in the future.

A second misuse of the Tax Incidence Study is making it a barometer of “ability to pay.” The measure of income is very important to creation of a meaningful tax incidence study. The Minnesota study uses Federal Gross Income as its measure of income because the law requires that it use “the broadest measure of income available.” Using a broad-based definition of income and a narrow definition of tax liability skews the study findings to appear more regressive than the tax system actually is.

My colleague at the Minnesota Free Market Institute, economist King Banaian, suggests two ways to eliminate that problem. One could deduct federal tax payments from federal gross income, or one could calculate the tax incidence including federal taxes paid (neither technique currently allowed by the state law mandating the Tax Incidence Study). The law notwithstanding, the combined federal, state and local tax system is progressive. The Congressional Budget office calculates the effective federal tax rate is only 4.3 percent on taxpayers in the bottom 20 percent of income earners, but 25.8 percent on taxpayers in the top 20 percent of income earners.

A third issue: Even accepting “fairness” as the overriding objective, the progressive solution of higher state income taxes actually increases, not decreases, the pre-tax income gap.

“Fairness” in the perfect progressive world means middle- and upper-income earners each pay 12 percent of their incomes in state and local taxes. Of course, some rich guy paying 12 percent doesn’t reduce the out-of-pocket tax burden on a middle-income person, but progressives aren’t talking effective taxation; they’re talking “fairness.” Here’s what really happens.

A uniquely skilled individual commanding a high salary can work just about anywhere he chooses. The mobile worker, the kind who pays the most taxes, will gravitate to where his net income, not gross income, is highest. To lure and keep highly productive individuals in Minnesota, Minnesota employers, including school districts looking for superintendents and universities seeking nationally known professors, must pay higher gross salaries to compete with low-tax states.

Higher salaries for those already earning top dollar don’t just increase the salary gap; they contribute to higher consumer prices and lower wages for non-mobile workers — the rest of us. When a company pays top-earners more to compensate for high tax rates, it means fewer dollars available to pay the rest of a company’s employees, further increasing the real wage gap irrespective of what the Tax Incidence percentages indicate. Is that really “fair”?

Bottom line, there are tradeoffs between a tax system based on economic principle, tax burden and efficiency objectives and a tax system motivated by distributional effects and equity objectives.

The public would be better served understanding and debating those tradeoffs than by class-baiting Sunday morning sound bites.

Craig Westover is a contributing columnist to the Pioneer Press Opinion Page and a senior policy fellow at the Minnesota Free Market Institute (mnfmi.org). His e-mail address is westover4@yahoo.com.

This commentary originally appeared in the St. Paul Pioneer Press, Friday April 24. 2009.

Posted in Commentaries, Craig Westover, Tax Policy | 1 Comment »

Rep. Matt Dean on Bonding for State Buildings

April 3rd, 2009 by Guest Posts

Responding to our post on the bonding process, state Rep. Matt Dean from Stillwater, an architect by trade, sent the following comments. Dean notes that the state does need to spend money on public buildings — and not “cheap ugly-ass buildings that do not work well and fall apart quickly.” It’s not the need, but the process that Dean questions.

What do you want to build? Why? And how do you propose to take care of it? Those are the questions legislators ought to address says Dean, but seldom do. Instead, the state builds new and expands rather than repairs and maintain just what it needs. Dean has a solution.

–Craig Westover

As an architect, I like to see stuff get built. But as a conservative, I hate to see the state waste money. As a conservative architect, I get pissed off when I see the state spend money on cheap ugly-ass buildings that do not work well and fall apart quickly.

The state does need to spend money on public buildings. We also need to spend money to keep them up. Bonding makes the most sense to pay for it. The real questions are: What do you want to build? Why? And how do you propose to take care of it? We have traditionally set our budget at no more than three percent of general revenue. This year, after scolding the GOP for attempting to break the limit in the past (credit card spending) the DFL wants to blow by the limit generally accepted by the bond houses as fiscally prudent to keep our rating.

Staying below the three percent level makes sense to me. That means we really can not spend the $300M-plus. Not even the $250M proposed by the house. Typically when the senate proposes $300M and the house $250M, they usually come together at $550M.

Vitruvius wrote that a building should have “firmness, commodity, and delight.” In other words, it should be durable, it should meet its purpose, and it should be pleasing to look at.

We need to focus on his first part, “firmness.” Where we have fallen down in the past is on the proportion of money we spend to maintain buildings. Why fix a building up when you can build a new one? This trend has given the state more square footage of building space (because we do not tend to sell buildings either) and a sicker stock of poorly maintained buildings.

If they were vacant, I would not be so troubled. Problem is, we keep filling them with more folks who collect money from the government. As we litterally grow government (buildings), I am convinced there is a natural reaction to fill them with government people.

The second area where we can do better is in the area of spending the money. No, I’m serious. We have hundreds of millions of dollars let by the legislature that agencies are sitting on to implement their schemes in the future.

Today I am offering an amendment to the house bonding bill that does two things. First, it cancels a whole bunch of previously bonded projects that the agencies are sitting on (from trails to the theatre-mobile in Mpls. Next, it spends the money on only ugly projects like roof repairs, road installations, flood clean upand roof replacements.

This Guest Post was written by Rep. Matt Dean of Stillwater.

Posted in Commentaries, Guest Posts, Limited Government | 5 Comments »

Sorry Charlie, You’re Still Wrong on Government Spending

April 1st, 2009 by Craig Westover

Charlie Quimby and the gang have broken out the silly graphics as evidence I doth protest too much about the evils of government spending. As noted in my comment to Quimby’s post, when one’s opposition spends time creating animated gifs and searching for photos of cereal boxes, one knows their arguments are lacking. Quimby’s post is here; my comment to it is reposted below. Taste them both, and determine for yourself which one stays crunchy… even in milk.

Update: See “Potholes on the Road to Serfdom .“

*****

C’mon, Charlie. Vigilance, the price of freedom and all that. When a principle is being constantly violated, why is it a sin to constantly remind people? And really, Charlie, if progressives don’t recognize the difference between the public good of education and non-essential government services, do they really have the wherewithal to govern? Is it any wonder that government intervention is virtually unrestrained?

And while you grant government the delusion of adequacy, you hold the free market to the standard of perfection. Of course, the free market is not the perfect engine of wealth creation. It is simply the best. When private companies lose money, they are effectively destroying wealth. No question. Here is the difference.

First, the wealth they are destroying is private wealth freely invested in anticipation of profit. The penalty for bad investment is paid by those making the bad decisions. (If fraud is involved, that is another story, but there is legal recourse for that, as there should be.) No one is coerced into making a private investment, as one is “forced” to invest in more costly, less efficient sources of energy production when government “invests,” or forced to invest in a failing automobile company as when government “invests.”

Second, a failing company ultimately goes out of business (baring, surprise, government intervention!) and ceases its drain on the wealth of the community. Government “rewards” programs that fail with more funding and more authority. Case in point, the Treasury Department has failed miserably to come up with a plan to “fix” the economy, so now it wants more money and more authority; GM is “too big to fail.”

Finally let’s address this point, not with an animated gif, but with some logic: “We’ve just been through a couple decades in which the objective of the smart money was not to create jobs, but to exploit the fault lines, chinks and timing of complex financial markets.”

I happen to agree with that, but rather than a problem with free markets, it is a problem of too much government intervention. A long recognized characteristic of human nature, and principle of economics, is that human beings acquire property in one of two ways – through their own efforts or through plunder, whichever is easier. Government, the rule of law, serves the legitimate function of making plunder the more difficult by enforcing force and fraud laws and increasing regulation that enhances the probability contracts will be honored. Laws preventing the use of force and fraud in voluntary contractual agreements may be overly burdensome in some cases, but they are always legitimate.

The situation of recent years, and the Enron et al scandals are also examples, government has intervened in the process, not to protect the process, but to manipulate the process with noble but misplaced intent to direct the outcome of voluntary agreements. Government regulation mandating how money must be loaned, government tweaking unequally the supply of money and the demand for credit, government micromanaging every transaction that went awry with a broad-based law (think mark-to-market) created those chinks and timing opportunities that made legal plunder more attractive than actually creating wealth. Had government kept to its proper role of preventing force and fraud, and done that job as thoroughly as it should, money would have flowed to its most efficient use, no housing bubble, and the economy would have made numerous self-corrections – minor pain for some, to be sure, but overall aggregate growth and opportunity.

As Milton Friedman noted, Charlie, “Underlying most arguments against the free market is a lack of belief in freedom itself.” And that, Charlie, is what is ultimately frightening about the progressive world view.

Sorry I could not contain this comment to a silly graphic.

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State Bonding: Essential — or not, period

March 31st, 2009 by Craig Westover

[This commentary originally appeared in the St. Paul Pioneer Press Friday, April 4, 2008. As the state Senate bonding bill is debated, it’s important to remember that the first criterion of any project is whether or not it contributes to an essential function of government. It’s also interesting to note that “no” is never a final answer to a legislator. The Rochester Volleyball Center, which appears in the recently passed Senate bonding proposal, was also on the table last year. Essential? You be the judge.]

Back in the days when grammar, not global warming, was taught in public schools, we learned that some adjectives can’t be modified. “Unique,” for example. Either something’s unique — that is, one of a kind — or it isn’t.

“Essential” is another. Rep. Alice Hausman, DFL-St. Paul, the chief House sponsor of the bonding bill, must have missed class the day they taught grammar; she most certainly missed the day they taught economics. Everything you need to know about bad bonding policy, you can learn from Alice Hausman.

On Wednesday the Minnesota House and Senate passed a capital investment “bonding” bill that authorizes the state to borrow $925 million to finance public works projects. Gov. Tim Pawlenty threatens a veto, saying $925 million is too much; it surpasses the state guideline for debt service of 3 percent of state revenue.

But, Hausman told the Star Tribune, the bill spreads out the bond sales without violating the 3 percent guideline. Thus, lawmakers can throw more money down the rabbit hole leading to Alice’s wonderland of grammatical and economic nonsense. Let’s start with the grammar.

In Alice’s wonderland, words mean whatever legislators need them to mean. Hausman defends the size of the bonding bill, saying legislative negotiators pared nearly $4 billion in requests to less than $1 billion in “most essential” projects. Not to pick nits here, but dictionaries define “essential” as “absolutely necessary; vitally necessary; indispensible.”

If a project request is “essential” to the state, then there are dire consequences to the state if it’s not funded; if it’s not essential, state government shouldn’t be funding it. “Most essential” is as nonsensical a concept as ever uttered by a mad hatter.

Consider the “most essential,” $3 million expansion of the National Volleyball Center in Rochester: absolutely necessary, vitally necessary, indispensible or no? Dire consequences for Minnesotans? Or no?

Responsible legislators might say “no,” but in Alice’s wonderland when some dodo makes a suggestion, everyone races around in a circle and everybody wins — and Alice doles out the comfits.

In Alice’s wonderland, everyone eats from the side of the mushroom that makes spending grow. Grinning like Cheshire cats, they ponder “how much the state CAN spend” rather than “how much the state SHOULD spend.”

Back in March, before the House and Senate agreed on $925 million as the “right” number for the bonding bill, Hausman hesitated to call a conference committee, which would determine the projects and funding that would make it into the final bill. Her rationale was: “Without agreement on the size of the bill, it is hard to write the first line.” Nonsense.

Hausman is absolutely wrong; the first line of the bonding bill is easy to write. It is an appropriation for an “essential” capital expenditure, which means the capital investment relates to a constitutional responsibility of state government that should not be delayed for another year. The second line meets the same criteria. So does the third. The last item in the bonding bill is the line above the first constitutionally legitimate expenditure that isn’t absolutely necessary.

If the bonding bill at that point is a mere $600 million, then that’s the appropriate and legitimate level of state bonding. If indeed everything on the list is both a constitutional responsibility of the state and essential to the state and the total is $1.25 billion, well, then legislators do have to look for other sources of revenue – first eliminating non-essential expenditures elsewhere in the budget.

In fairness, we should note that Hausman’s approach to bonding is not unique. Although the governor says at $925 million the bonding bill is “too much,” he is still on the same side of the looking glass as Hausman. He, too, starts with a bonding bill cap instead defining which projects are essential and which are not. Nibbling on the other side of the mushroom to shrink the bonding bill to a mere $825 million is less damaging to taxpayers, but no less a mocking of fiscal responsibility.

In Alice’s wonderland, the bonding bill is a croquet game without rules where taxpayers take the roles of flamingoes (mallets) and hedgehogs (balls) and get knocked around and rolled through hoops at the whim of legislators. Sadly for taxpayers, the bonding bill is not a fantastical dream; it’s simply fantastical. How the state can refuse to bond for essential roads and bridges while at the same time eagerly passing on to our children the debt on local hockey arenas and polar bear exhibits is beyond my per diem level.

Go ask Alice, when she’s 10 feet tall.

Craig Westover is a contributing columnist to the Pioneer Press Opinion page and a senior policy fellow at the Minnesota Free Market Institute (www.mnfmi.org). His e-mail address is westover4@yahoo.com This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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Conservatives can’t cave to chest-beating primates

March 30th, 2009 by Craig Westover

gorilla2

Conservatives lose economic arguments, not because they are wrong, but because gorillas are cute.

On the Opinion page of the St. Paul Pioneer Press today (“Minnesota Senate’s bonding bill a responsible action”) state Sen. Keith Langseth, DFL-Glyndon, grabs the guidon of government on the march and hails the Senate’s $329 million public works bill as “the most responsible thing the Legislature could do to help the state climb out of the recession.” More than half the projects in the bill, he writes, are “asset-preservation projects” that are “ready to go,” “will employ local construction workers all over the state,” and “will immediately create jobs.”

Blarney, said Jonathan Blake, vice president of Freedom Foundation of Minnesota, in a Pioneer Press op-ed (“Minnesota Senate bonding bill is irresponsible”) last week, “How many jobs will these projects actually create?” Blake points out that Langseth’s own estimates range from 5,000 to 3,500 new jobs while some media reports suggest 15,000 jobs will be created. Last year DFL Senator Steve Murphy promised that tax increases in the massive transportation bill, passed over the governor’s veto,would create 33,000 jobs “in the very first year.” Murphy now admits his estimate (a polite euphemism for bullsh*t – he didn’t even try to get it right) was off by 100 percent. Blake concludes the job numbers were being “pulled out of thin air.”

And, asks Blake, “How exactly does a gorilla exhibit stimulate the economy? Are bike trails really the most efficient way to put people to work? Why should all state taxpayers fund a new runway in Bigfork?”

And with knockout punches on job estimates and project value, Blake clearly wins the debate, and conservatives lose the issue.

Here’s why. Once the threshold economic principle is breached and liberals get conservatives arguing about the details of tax and spending plans, how cute gorillas are, liberals win. Remember, the public thinks gorillas are cute, and if the perception is that somebody else is picking up the tab, they want to go look at gorillas. They like their bike paths, and they don’t have any (or so it seems) out-of-pocket expense for them. Airports seem important, why shouldn’t government pay. We need roads and bridges; who’s going to build and maintain them if not the government?

If conservatives hope to make any progress at all winning the hearts and minds of the public, they have to keep the context of the debate on the threshold principle, the “big lie,” if you will. In this case the “big lie” is Langseth’s claim that government spending, in and of itself, creates jobs and “will help the state climb out of the recession.”

Government spending doesn’t create jobs. We’ve been down this road before. In fact, non-essential government spending is a swift kick to the privates (pun intended) that is doubly painful. Government can’t spend a dollar building roads, bike trails or anything else of benefit to chest-beating primates until it takes the dollar from a productive taxpayer, i.e. someone who has with his or her labor earned a dollar by creating a dollar’s worth of value for someone else. The dollar spent by the government is an unearned dollar not spent by the person who earned it. The dollar used by the state to “create a job” is a dollar not available to the person who earned it to create a job, support an existing job or invest so as to allow someone else to create a job.

The double whammy occurs when government spends the dollar on a non-essential project. The reason St. Paul’s gorillas need subsidized housing, and Rochester needs a subsidized home for international volleyball events, is that no private individual would invest in those enterprises. In other words, there is a more efficient use of capital creating a higher return for the investor because people want or need something more than they want to go look at gorillas or watch the French actually compete at something. When government subsidizes something because the market will not support it, government is diverting capital from its most efficient use to a lesser use and the community as a whole loses, which is hardly a line to pull us out of a recession.

Government can’t create jobs, it can only change the mix of employment, and when it does so through non-essential projects undertaken simply because they are “ready to go,” it harms not helps the economy, is the threshold principle that conservatives must defend. Why argue with liberals about how wrong their job creation numbers are when the right job-creation number is zero? Why argue about whether gorillas have educational value (might be nice if the kids studied economics) or if volleyball centers draw international events to Rochester when the key to pulling out of a depression is getting dollars flowing to their most productive use? To where we get more for less, not less for more.

If creating jobs were as easy as passing a bonding bill out of the state Senate, why did Langseth and his cronies stop at $329 million? Why not double that number and create twice as many jobs? Triple it even. Seems the “most responsible thing the Legislature could do” is pass an even larger bonding bill. And then, just to create even more jobs, legislators could go on a window-breaking rampage. Just think how many glaziers we would need to employ!

Update: See “Rep. Matt Dean on Bonding for State Buildings“

Posted in Commentaries, Craig Westover, Limited Government | 5 Comments »

The Utter Folly of ‘Taxing the Rich’

March 13th, 2009 by Pat Anderson

^{This article originally appeared in the Star Tribune on February 23, 2009. Comments welcome there.}

To date, legislators who eventually must resolve the looming $6 billion state budget deficit have been trial-ballooning spending cuts and tax increases while looking over their shoulders with fingers crossed hoping that the federal stimulus package will help bail them out.

The bill President Obama signed last week promises about $2 billion in general-fund dollars for Minnesota in one-time money. That will certainly help with the 2009-10 budget cycle, but one-time money doesn’t address the sustainability, or lack of sustainability, of current and projected levels of state spending.

Certainly state government can work smarter and improve efficiency, but given current spending levels, it is also imperative that Minnesotans rethink how and what services government is meant to provide. Reform is not simply one option.

Nor is it an option, as some on the left are suggesting, to maintain state spending at current levels, use the bailout money to help plug the budget hole and increase income taxes on the top wage earners to fund the rest. That doesn’t solve the systemic gap between revenue and spending, and it’s bad policy in a recession.

Under Minnesota’s progressive income tax, the bottom half of filers, those households making under $45,000 per year, pay about 5 percent of all state income taxes. Overall, they pay less than 2 percent of their household income to the state for income taxes.

The top 10 percent, households earning over $130,000, pay an average rate three times higher. It’s about 6 percent individually and 55 percent of all state income taxes collected. These households are generally two-income professionals with children. They are middle-aged families making house payments and saving for college tuition and retirement while meeting day-to-day expenses.

A progressive system? Absolutely. So why are some folks proposing to raise the top tax rate again?

The progressive argument is that high wage earners “can most afford” to “pay for a better Minnesota.” The fact is they can’t. Not now. The reason the state has a deficit is because, given our progressive income tax structure, in times of recession when higher earners see investment earnings tumble or lose their jobs, state revenue is hit disproportionately hard.

The top 5 percent of households have incomes over $180,000 and pay 43 percent of all state income taxes. This group includes many small- and medium-size businesses whose owners who run their businesses as S corporations. This means that business income is passed directly through to them on their personal tax returns.

According to the Minnesota Chamber of Commerce, 92 percent of all businesses flow their business income through a personal tax return, where it appears as personal income. In fact, from that “income,” the owner must take his personal income and find money to plow back into the business to make it grow.

Today, when many employers are simply trying to keep the doors open and the staff employed, increasing already high taxes is not a tax on the wealthy so much as a tax on a struggling small-business owner, which puts his working-family employees’ jobs at risk. In a recession, tax increases equate to layoffs. The employer’s tax burden has to come from somewhere.

Taxes on the “wealthy,” like so many progressive policies, actually work against the stated objective. If the tax burden gets too high, the “wealthy” simply pick up and leave for warmer climates. Homes are cheap in Florida, and a dollar stretches a lot further when there are no state income taxes. When these people move, they take the jobs they provide and the taxes they pay along with them. And, ironically, to woo new high-earners with job mobility to the state, companies must offer higher wages to offset higher income taxes, in effect increasing, not decreasing, the wage gap that seems so “unfair.” Mobility is much easier for citizens and businesses in the 21st century.

I would hope that before any legislators consider a class-warfare offensive, they remember who pays for state programs. Punishing hard work and ingenuity does not bode well for the long-term health of our economy.

Punishing job creators so that we can expand non-sustainable government programs makes no economic sense. Even President Obama has stated that raising taxes is not an appropriate action to take in a recession. I urge his Minnesota disciples to take him at his word.

Pat Anderson is president of the Minnesota Free Market Institute. She is a former state auditor.

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