Some Consequences of Government Rationing

In “Rationing Health Care” and “More on Rationing Health Care” I describe why employer provided health care how employer provided health care was created as a response to the price and wage controls imposed during WWII.  Employers could not raise wages but the government permitted them to offer health care benefits to employees in addition to wages.  New laws made health care expense deductible for the employers and did not count the health care benefits as taxable income for the employees.  Because health care payments paid with the employees wages were taxable, both the employer and the employee had a financial motive to push more medical employee paid health care expenses onto the group plan paid by the employer.

The law created a tragedy of the commons and the common resource was the group plan.  Health care is over consumed because the employees have no incentive to control expenditures but all pay for the increasing costs because the cost of the group plan has increased.  There are basically two ways to control rising costs.  Employees must be again be exposed to market prices or the employer through the group provider must ration health care.

Medicare and Medicaid have created similar tragedies of the commons.  The elderly and the poor get benefits paid for largely by taxpayers, and consequently have little incentive to control consumption.  President Obama’s health care reform would ration health care benefits through expert committees.  A couple of articles describe the impact of government rationing in the Tennessee and the United Kingdom (“Patients to wait longer for care under new health law, think tank says,” “Cataracts, hips, knees and tonsils: NHS begins rationing operations”).

In Tennessee, approximately 700,000 citizens will gain health coverage (demand expands from D0 to D1), most will be younger men with low incomes who will become eligible for Medicaid.  The remainder are people who qualify for subsidies to buy insurance though newly created state health exchanges.  As demand expands without a corresponding increase in health care providers, the price of health care increases as does the quantity of health care provided (the increase in demand has caused a change in quantity demanded along the original supply curve and equilibrium has shifted from A to B).  More health care will be demanded at a higher price.  Somebody has to pay.  Sources cited in the article suggest that taxpayers and healthy young adults that do not qualify for subsidies will subsidize the poor and infirm. 

The second article explains that the National Health Service will ration hip replacements, cataract surgery and tonsil removal as well as other operations to control burgeoning budgets. 

Society cannot afford to provide all the health care that people desire.  As health care becomes more effective and more expensive, people will not be able to afford all beneficial care.  Public payment for health care has or will hit the same ceiling.  We as individuals or collectively cannot afford everything we want.  Resources are scarce.  It seems cruel to force a dying person to examine their financial records to determine if they wish to spend their remaining wealth on a procedure that might be effective.  Many will not have the resources to pay.   It also seems cruel to tell a dying patient that she does not meet the cost benefit criteria for a procedure that might extend her life.

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Speculators

Every time oil prices rise rapidly, politicians seeking to curry support from beleaguered consumers blame speculators, a nebulous gang of ne’er-do-wells.  If speculators have the power to drive up oil prices, why would Brent crfe prices fall by 13.3% and U.S. crude fall 14.7% for the week (“Oil falls again, gutted in record weekly drop”)?

The price of oil is determined by the interaction of supply and demand.  The demand for oil has been growing because consumers in developing countries like China, India and Brazil have more income.  Supply of oil has largely stagnated.  It is not just that the supply of oil beneath the earth’s surface is finite, in many countries governments restrain exploration and production.  Policies that limit production when demand is growing cause to higher prices.

The expectation of future price affects both the demand and supply for oil.  If buyers expect prices to increase in the future, they buy now.  If sellers expect prices to increase in the future, they sell later.  Profit motivates speculators.  If they guess the direction of prices correctly they can make hefty profits.  If wrong, they will face similar losses.  On the whole, speculators act in future markets to adjust and smooth prices over time, providing an important service to producers and consumers.

Oil prices will remain volatile because both supply and demand are not particularly responsive to price and much of the production for export markets is in politically unstable countries (For more information on the function of speculators see “Oil Speculators: Bad or Good”).Replace this text with...
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The N.F.L. and Dementia

Most fans know that football is hard on players' bodies. This is a reason that careers are short and salaries are high. The danger of the sport is part of the supply function of players. Alan Schwarz reports on a raging debate about a new health threat in a New York Times article, "N.F.L. Study Finds Link to Dementia."

A study commissioned by the National Football League reports that Alzheimer’s disease or similar memory-related diseases appear to have been diagnosed in the league’s former players vastly more often than in the national population — including a rate of 19 times the normal rate for men ages 30 through 49.

The N.F.L. has long denied the existence of reliable data about cognitive decline among its players. These numbers would become the league’s first public affirmation of any connection, though the league pointed to limitations of this study.

The findings could ring loud at the youth and college levels, which often take cues from the N.F.L. on safety policies and whose players emulate the pros. Hundreds of on-field concussions are sustained at every level each week, with many going undiagnosed and untreated.

A detailed summary of the N.F.L. study, which was conducted by the University of Michigan’s Institute for Social Research, was distributed to league officials this month.

The study has not been peer-reviewed, but the findings fall into step with several recent independent studies regarding N.F.L. players and the effects of their occupational head injuries.

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Radical Chic Environmentalist Mau-Mau Paper Companies

Radical chic environmentalists complain that American's use of soft toilet paper is environmentally destructive, preaching that we should use recycled paper instead.  They are mau-mauing corporate executives who feel pangs of guilt when their companies make products their customers enjoy.  As described by David A. Fahrenthold of the Washington Post, in "Environmentalists Seek to Wipe Out Plush Toilet Paper," most executives are listening to their consumers and ignoring environmentalist.

There is a battle for America's behinds.

It is a fight over toilet paper: the kind that is blanket-fluffy and getting fluffier so fast that manufacturers are running out of synonyms for "soft" (Quilted Northern Ultra Plush is the first big brand to go three-ply and three-adjective).

It's a menace, environmental groups say -- and a dark-comedy example of American excess.

The reason, they say, is that plush U.S. toilet paper is usually made by chopping down and grinding up trees that were decades or even a century old. They want Americans, like Europeans, to wipe with tissue made from recycled paper goods.

It has been slow going. Big toilet-paper makers say that they've taken steps to become more Earth-friendly but that their customers still want the soft stuff, so they're still selling it...

But despite environmentalists' concerns, they say customers are unwavering in their desire for the softest paper possible.

The questions is why do these companies listen to the radically chic environmentalist at all?  It really could be environmental guilt.

This summer, two of the best-known combatants in this fight signed a surprising truce, with a big tissue maker promising to do better. But the larger battle goes on -- the ultimate test of how green Americans will be when nobody's watching.

"At what price softness?" said Tim Spring, chief executive of Marcal Manufacturing, a New Jersey paper maker that is trying to persuade customers to try 100 percent recycled paper. "Should I contribute to clear-cutting and deforestation because the big [marketing] machine has told me that softness is important?"

Toilet paper producers should focuse on supplying products that their customers demand within the confines of the law.  Perhaps this is the rub.  These environmentalists might have threaten to use their political muscle to legislate their morality if the producers do not comply with their demands.  I offer no evidence, just a concern for freedom.
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Implementing Britain's Renewable Energy Policy

(HT Drudge)  Andrew Porter, the political editor of the Telegraph, writes about Britain facing impending blackouts due to mismanaged energy policy in "Britain facing blackouts for first time since 1970s," dated August 31, 2009.  In the talk of creating a green economy and jobs elected officials seem to miss an important point: most policies designed to foster the development of clean energy do so by driving up the cost of nonrenewable relative to renewable fuels.  That is the objective of carbon taxes, fuel taxes, and restrictions on building nonrenewable fueled power plants.  These policies are justifiable economically up to the point that the marginal benefits from a cleaner environment exceed or are equal to the marginal costs of implementing the green policies.  If the marginal costs exceed the marginal benefits, the policy should not be implemented. 

Rationing of economic goods can be accomplished in many ways.  Economists generally prefer rationing through price.  Those who desire to pay the market price can buy the good and those who believe the price is too high will not; the quantity supplied to the market will equal the quantity demanded.  Britain seems to be on a path to ration electricity through blackouts.  Blackouts can be avoided by increasing price.  Apparently, British policy makers would rather hide increases in cost by rationing through blackouts rather than acknowledge that their policy increases energy prices.

Porter describes the problem and how it came to light.

Demand for power from homes and businesses will exceed supply from the national grid within eight years, according to official figures...

The gap between Britain’s energy needs and demand throws fresh doubt on the Government’s assertion that renewable energy can make up for dwindling nuclear and coal capabilities.

The admission that Britain will face power-cuts is contained in a document that accompanied the Government’s Low Carbon Transition Plan, which was launched in July...

Under the plan, 40 per cent of the UK’s electricity will need to come from low-carbon energy sources including clean coal, nuclear and renewables...

Greg Clark, the shadow climate and energy change secretary, said:..."The next government has an urgent task to accelerate the deployment of a new generating capacity, and to take steps to ensure that as a matter of national security there is enough capacity to provide a robust margin of safety.”

Mr Clark also pointed out that the scale of the blackouts could in fact be three times worse than the Government predictions. He said some of the modelling used was “optimistic” as it assumes little or no change in electricity demand up until to 2020.

It also assumes a rapid increase in wind farm capacity. There is also the assumption that existing nuclear power stations will be granted extensions to their “lifetimes"...

Our citizens and policy makers should closely study Britain's problems in implementing a clean energy policy as we attempt to replace fossil fuels with renewable fuels. 
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