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Archive for September, 2012


End Medicare?

The Democratic Party election machinery, especially SEIU, is asserting that various Republican congressmen and women have voted to end Medicare as we know it. While this is substantially untrue, we could ask whether this a bad thing? The elderly needed health care insurance because health care insurance is generally tied to employment. Retirement often cuts that link, so along came Medicare to fill the void. But can we conceive of an alternative?

What we really need, in an age in which people both switch jobs more frequently and grow old is private insurance that is for a lifetime: insurance that gets started before most pre-existing conditions get started and lasts until the end, insurance that cannot be cancelled. Of course, we need the features of this insurance to meet other specifications as well. But we do not need Medicare at all.

What are the specifications needed for lifetime private insurance.

1. Very large natural groups. A natural group is one to which people belong naturally and cannot join or leave by choice. For example, all people born in Indiana would be a natural group.

2. Choice in terms of the nature of insurance policies. People in a group should be able to choose whether they want high deductibles or low, health care savings accounts or not, and so on.

3. Prices of health care insurance held down by competition for business in these large natural groups.

Focusing on health care insurance alone does not directly address the cost of medical care. That is a story for another time.

For an outline of insurance and cost reform issues, see my post on the subject.


Fed to buy Chevy Volts?

It has been revealed that the Fed is going to be buying mortgage backed securities in the latest version of QE, I guess this makes QE III. The point is that the Fed imagines that there is still trouble in the mortgage backed security industry. Well, there is trouble on other fronts as well. For example, GM is having trouble selling Chevy Volts, their electric car. So why in the heck doesn’t the Fed buy and park Chevy Volts?

The point is that there is a beauty to limiting the Fed open market operations to government bonds. This limits the mischief that the Fed can get into. That is, they can ratify terrible fiscal policy, but that is the extent to which they can screw up the economy. Now the Fed seems to have opened a new front. It appears that they feel free to meddle in any industry that, in their view, deserves their help.

Bernanke is presiding over the end of Fed independence, because the flood gates have been opened. Other industries will now look to the Fed to fix their problems.

If we ever get back to the days when the money multiplier meant something, I suggest that the Fed should stick to trying to achieve a single goal, price level stability. Furthermore, I suggest that the Fed should stick to a single asset class: government bonds.


To whom do we owe that?

Decades ago we were told that government debt was not a problem, because we owed it to ourselves. This point cannot be made today. We owe about 50% of the debt held by the public (that is, people) to foreigners. We owe over 30% of the total debt to foreigners. Owing it to others may constrain future decisions on what to do with the debt.  For example, some may argue that we should inflate in order to reduce the impact of the debt. Can you imagine the impact on the foreign central banks that hold much of this debt? Can you imagine how they will squeal? Of course, I would squeal too. Would you?