The president is making sense
Ezra Klein and Matthew Yglesias both catch President Obama making sense on the public option:

QUESTION: Wouldn’t that drive private insurance out of business?

OBAMA: Why would it drive private insurance out of business? If private insurers say that the marketplace provides the best quality health care; if they tell us that they’re offering a good deal, then why is it that the government, which they say can’t run anything, suddenly is going to drive them out of business? That’s not logical.

Making Sense? I respectfully disagree. Obama’s answer conveniently leaves out some important economic factors.

President Obama asks, “Why would it drive private insurance out of business?”

The answer is simple:

1. Because the government operates outside the market and price system and therefore has the unique ability to artificially set their price below the competitive market (something private insurers do not have the power to do, because their price is determined by supply and demand). Contrary to popular belief, Prices in the free market are not set arbitrarily. This is easily demonstrated by Craigslist. I recently tried to sell a rather ugly southwestern style kitchen table for $200. I actually figured that it probably wasn’t worth that, but I thought I would try it and see if I got any bites. No Response.
   Soon – I lowered the price to $150. Nothing.
   Finally, I lowered it to $100 and I sold it fairly quickly. You can see that I could not sell the table for more than it’s actual real-world perceived value. I didn’t really set the price at $100, rather, low demand for the ugly table did.
2. Also – the government is funded through non-voluntary trading – by taxation, thus has no competition, no bottom line, no incentive, nor any reason whatsoever to function efficiently. Nor do they have any real incentive to provide ‘better health care’ (In a public system – someone in an office, who knows nothing about you, will determine the policy of what is considered ‘adequate’ healthcare based on what – Statistical data?) since you don’t get to choose to pay (essentially, vote with your dollars) for their service. Only the government has the power to force you to pay for their service, whether you want it or not. Private industry has to offer you something you value more than your own money, to earn your business.
3. Finally, the fact that most people falsely perceive government options as “free,” basically guarantees overwhelming popular and political capital for an idea that you cannot choose not to pay for. Even if the actual outcome of such a program is poor, the majority of voters will subscribe to the nice sounding idea that everyone should receive health care. It is, after all, a noble sounding ideal – but unfortunately, when measured against history, or any kind of actual economic cost/benefit results – it fails.

I would expect Paul Krugman, Ezra Klien, Matthew Yglesis, and President Obama to know better, but political capital is so much easier to get excited about, than the, rather, wet blanket that is economic reality. It’s time (yet again) for one of my favorite quotes:

“The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”
-Thomas Sowell

You cannot buck economic forces. In my view – they are as consistent and absolute as the laws of Mathematics. Yet they seem to be the first to be disregarded in the face of an idea that sounds really satisfying.

I have written much more extensively on this here: Healthcare: Economic Reality vs. Political Capital

People who like the tax-free status of their company health benefits could be asked to ante up. Money in the pot: more than $700 billion over 10 years.

Treasure the tax benefits from your health savings account? Some experts say the accounts encourage “excess consumption” of health services…

…

“I know that there is some controversy around doing so,” Baucus said. “But the current tax exclusion is not perfect. It is regressive. It often leads people to buy more health coverage than they need.”

Hang on a minute! Did Senate Finance Committee Chairman Max Baucus just admit to an economic reality? Namely, that demand for health care services goes up when the cost is low? It will be interesting to see if this economic truth finds its way further into political rhetoric.

Low perceived cost, and who really pays for employee benefits

Whether he intended to or not, Baucus is making a very valid point. Because health insurance is often provided by employers, individuals (employees) are far less likely to consider actual medical care costs. Just ask how many people with employee provided benefits run a price comparison around town before seeking out medical care? I certainly don’t.

Also, since the employer usually chooses the insurance package – it is likely that some employees may be getting more insurance than they actually would choose to receive otherwise. The problem is that employees don’t realize they are paying for their own insurance coverage, even though it appears their employer is.

This is again, a simple economic reality. Hiring an employee is a cost to the employer. That cost includes the employee salary, PTO, and any benefits package offered, among other things. Thus, employee salary is likely reduced as a factor of the total employee cost, including the employer provided benefit package. Therefore, employees essentially agree to lower pay – and receive greater benefits, even though they may not perceive it this way.

The false perception that employee benefits are, “free,” has economic ramifications. Back to Baucus’ point: Employees with employer provided health insurance are less likely to consider the actual cost of the health insurance and medical expenses received, which results in higher demand for health care services. Higher demand drives up health care prices, as well as driving up the price of health care insurance. ”Excess consumption,” is just a symptom of the perception of low cost. We would see the same phenomenon if health care prices were artificially driven down through government action.

Which brings us to the next logical conclusion:

Universal Health Care will create much higher demand for health care

Take the current, ”Excess consumption,” and multiply it by some arbitrary huge number, like, say…oh…let’s be conservative with $1.85 trillion. Since everyone will be covered under a government program - no-one will think about the cost of medical expenses, because it will be perceived as, “free”. This will obviously create a huge increase in, “Excessive consumption,” which will further drive up the real cost of medical care. The rising costs will then be paid by the government, who is really you – the taxpayer.

So in a universal coverage program, how will the government combat the increase in demand and cost?

Rationing, and much higher taxes.

The government will have no other option but to place limits on health care usage through bureaucracy. This isn’t because the government has bad intentions, but simply because, regardless of the public’s perception of cost, the real economics of medical service will still be in effect. The government will be paying the bill the public doesn’t see. As price goes down, demand goes up. Government will have no choice but to ration medical care and radically hike taxes, or the nation will face shortages and/or bankruptcy as real medical costs skyrocket.

This probably seems too simplistic, but this isn’t just some crazy theory. We already see this happening in Canada and the U.K. In a way – we even see it here in the U.S. with employee provided health insurance, as Baucus pointed out.

Of course, none of the economic factors really matter here because the notion that “everyone should have health care” is excellent political capital. How can you possibly run against “health care for everyone”, without appearing like an uncaring jerk? Thus, I doubt Baucus will make this logical progression when he talks about universal medical care.

Similar to demographic facts, economic realities are always depressing wet blankets thrown on any nice sounding, “fix all,” political vision. As economist, and former Marxist, Thomas Sowell said:

“The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.“

Will the economic reality Chairman Max Baucus stumbled into find it’s way into discussions of universal health care?

One can only hope.