Part of the legacy of the Bush administration with its mistaken tendency to rely on unfettered capitalism as the engine of economic growth and capital formation is the Obama administration with a mistaken tendency to believe that legitimate functions of the private sector should instead be directed and controlled by or subsumed into the government. (Each administration has been supported in its views by a majority in the Congress.) The old administration could not understand why there was a call for government intervention in failed markets. The new administration does not understand why there is a call for less government intervention before markets fail in a different way.
Examples about the Bush administration are rampant and I need not repeat them here. Those folks are gone anyway.
But the new administration is here and some commentary is called for. With a 9-10% official unemployment rate and another 7-8% of the population no longer looking for work or underemployed the top priority should be to adopt policies that will stimulate job creation. Economic recovery of the sort that creates jobs will depend on private sector innovation and risk-taking. Signals from the administration suggest that this will be discouraged.
Let me give two examples from the health care field. These will be controversial because the sectors I discuss have serious detractors and have not always provided the best examples of citizenship; but they are important as major employers in the country.
I'll start with insurance companies. Commentors on this blog and elsewhere wonder why there should be private insurance companies in the business of providing health care coverage. The answer is that there are actuarial risks associated with the payment of health care costs. Private insurance companies make or lose money depending on their ability to manage that risk and to be innovative in design of new insurance products. (Yes I know they sometimes do other things that are nasty -- like pre-existing condition exclusions -- but those practices can be statutorily eliminated or regulated.)
When the government provides health insurance the actuarial risk does not disappear. Instead it is built into the cost of government. The proposed Obama public insurance organization is one that will attract customers who are actuarially higher risks. Because there will be an expectation of "affordable" premiums for this group of people the organization will be given authority to use public funds or the public balance sheet to cover those actuarial risks. To the extent such subsidies are implicit in the premiums of the public insurance organization it will have a competitive advantage vis-a-vis the private insurers. It will grow and they will shrink. So of course the private companies lobby against the public option.
Let's now turn to the pharmaceutical companies who had promised the administration several billions in savings over the coming decade. There was shock recently when those companies raised their prices for drugs. What did they have in mind? Well they were already looking at flat profit margins because of patent terminations and long cycles in drug development. They are concerned that growth in the industry will move from the US to countries like India and China which are encouraging its development. Then they watched how the health care legislation was evolving and saw nothing that would help them in the American market and feared things that might harm them and so they took a pre-emptive step.
Here is the ironic political dynamic: Every time an industry responds to a potential government intervention with an unpopular move it provides fodder to the Obama folks that more such intervention is necessary. "See how selfish they are" is the refrain.
To which I say yes they are selfish because that is the nature of capitalism. People will not risk their money to invest in enterprises unless there is a reasonable possibility for return consistent with the underlying risk of the business. I have talked to many people in the venture capital world and the private equity world who have decided to hold back on new investments in the health care field because they do not see a dynamic that will reward risk-taking. They look at the treatment of the insurance and pharmaceutical sectors and assume that a similar scenario will come to play in other segments of the industry. Their anxiety is compounded by their belief that the cost of the health care legislation will be much greater than estimated. Therefore they believe that more and more of the industry will find itself subject to governmental constraints over time.
As we saw all too clearly during the Bush years a lack of government regulation can be exceptionally dangerous for the economy. I worry that the swing of the pendulum has now gone too far and that there is too great a reliance on government intervention that will be dangerous in its own way.
Please recall as I say this that I am strong supporter of expanding access to health insurance and other necessary reforms. I believe some expanded government role is needed to achieve those goals. This is a question of degree.
Examples about the Bush administration are rampant and I need not repeat them here. Those folks are gone anyway.
But the new administration is here and some commentary is called for. With a 9-10% official unemployment rate and another 7-8% of the population no longer looking for work or underemployed the top priority should be to adopt policies that will stimulate job creation. Economic recovery of the sort that creates jobs will depend on private sector innovation and risk-taking. Signals from the administration suggest that this will be discouraged.
Let me give two examples from the health care field. These will be controversial because the sectors I discuss have serious detractors and have not always provided the best examples of citizenship; but they are important as major employers in the country.
I'll start with insurance companies. Commentors on this blog and elsewhere wonder why there should be private insurance companies in the business of providing health care coverage. The answer is that there are actuarial risks associated with the payment of health care costs. Private insurance companies make or lose money depending on their ability to manage that risk and to be innovative in design of new insurance products. (Yes I know they sometimes do other things that are nasty -- like pre-existing condition exclusions -- but those practices can be statutorily eliminated or regulated.)
When the government provides health insurance the actuarial risk does not disappear. Instead it is built into the cost of government. The proposed Obama public insurance organization is one that will attract customers who are actuarially higher risks. Because there will be an expectation of "affordable" premiums for this group of people the organization will be given authority to use public funds or the public balance sheet to cover those actuarial risks. To the extent such subsidies are implicit in the premiums of the public insurance organization it will have a competitive advantage vis-a-vis the private insurers. It will grow and they will shrink. So of course the private companies lobby against the public option.
Let's now turn to the pharmaceutical companies who had promised the administration several billions in savings over the coming decade. There was shock recently when those companies raised their prices for drugs. What did they have in mind? Well they were already looking at flat profit margins because of patent terminations and long cycles in drug development. They are concerned that growth in the industry will move from the US to countries like India and China which are encouraging its development. Then they watched how the health care legislation was evolving and saw nothing that would help them in the American market and feared things that might harm them and so they took a pre-emptive step.
Here is the ironic political dynamic: Every time an industry responds to a potential government intervention with an unpopular move it provides fodder to the Obama folks that more such intervention is necessary. "See how selfish they are" is the refrain.
To which I say yes they are selfish because that is the nature of capitalism. People will not risk their money to invest in enterprises unless there is a reasonable possibility for return consistent with the underlying risk of the business. I have talked to many people in the venture capital world and the private equity world who have decided to hold back on new investments in the health care field because they do not see a dynamic that will reward risk-taking. They look at the treatment of the insurance and pharmaceutical sectors and assume that a similar scenario will come to play in other segments of the industry. Their anxiety is compounded by their belief that the cost of the health care legislation will be much greater than estimated. Therefore they believe that more and more of the industry will find itself subject to governmental constraints over time.
As we saw all too clearly during the Bush years a lack of government regulation can be exceptionally dangerous for the economy. I worry that the swing of the pendulum has now gone too far and that there is too great a reliance on government intervention that will be dangerous in its own way.
Please recall as I say this that I am strong supporter of expanding access to health insurance and other necessary reforms. I believe some expanded government role is needed to achieve those goals. This is a question of degree.