The Great Deformation (129 page)

In fact, the total job count in the oil and gas extraction industry is just 195,000, and is up by only 30,000 jobs since the fall of 2008, when Bernanke began pumping ultra-cheap debt into the oil and gas patch by way of Wall Street drilling funds and other vehicles of high-yield speculation. Accordingly, the next bubble bursting may well be the shale bubble, and the next bailout demands will come from the junk oil speculators who have recently moved from the sand belts to the Black Hills.

Meanwhile, $100 billion annually is being wasted on energy tax breaks, subsidies, and credits. All the varieties of black and green energy are noisily lined up under the banner of jobs and growth, but most of the beneficiaries would not survive in an honest free market. Indeed, so desperate are these hothouse energy wards of the state that even the wind farms managed to climb aboard the Christmas tree of tax-cut extenders that passed on New Year's Day 2013. That spoke volumes: the wind is free and the nation is broke, but the crony capitalists of energy plundered on.

THE MEDICAL CARE COMPLEX:

ULTIMATE DEFORMATION OF THE STATE

When it comes to plunder, however, the medical care complex is in a league all by itself. The greatest of all abominations on the free market is employer health insurance, a product that would not exist if it were taxed like other wage income and which is not insurance at all but merely a form of prepayment for health services. Like many of the other deformations which distort the free market, today's giant $200 billion per year tax subsidy for employer health plans was a New Deal special (wartime phase).

Organized labor wanted higher pay, but FDR's wage and price controllers didn't want to break the wage cap visibly, so they invited organized labor to visit the backdoor of the IRS after hours. In some long forgotten conference in 1943, it was decreed that employee wages paid in the form of pre-paid health services were not taxable. The rest was history: so-called employer health insurance plans drove a giant wedge between the higher prices received by doctors and hospitals and the negligible out-of-pocket costs felt by medical service consumers.

In the fullness of time, health-care inflation came to occupy its own perch far above all others. During the last half-century, for example, the consumer price index has risen by 8X, average wages by 10X and hospital costs per day by 40X. Inflation in physician costs, drugs, lab tests, and most other health services has been only slightly less explosive, but the underlying cause is the same: routine health services are not insurable risks because both providers and consumers heavily drive the frequency and cost of service.

In certain extreme demographic strata, for instance, the rate of obesity and diabetes is so high that health coverage amounts to providing arsonists with fire insurance. Likewise, it has long been demonstrated that the incidence of a variety of surgical procedures per 100,000 population is a function of the number of surgeons in the catchment area. In truth, employer-provided health insurance is one of the great deformations of our times, and is no more an honest form of free market insurance than Social Security pensions. Instead, it is a form of tax-subsidized cost pooling in which overutilization, overpricing, and free-riding is endemic.

Were the problem of employer health insurance contained within the mainly middle-class population (about 170 million) covered by such plans there would be serious economic efficiency and equity costs, but these would not be the worst blemishes on the free market: workers would transfer some of their income to doctors and hospitals unnecessarily and health-care resources in general would be drastically overconsumed. But the insuperable problem is the
massive spillover on innocent citizens:
rampant
health-care inflation means that much of the non-employer-plan population is eventually priced out of the health-care system, including the poor, the retired, the self-employed, and those with preexisting conditions.

Once again, therefore, one market disturbance by the state begat another. Already by the mid-1960s the poor and elderly were being squeezed, and so Lyndon Johnson succeeded in dramatically updating the New Deal via Medicare and Medicaid. The obvious and well-intended purpose was to effectively supplement the incomes of non-working populations being priced out of the health-care market, but what LBJ inadvertently delivered was the greatest victory for crony capitalism ever imagined.

The giant misfire is that the Johnson plans did not deliver cash to people in need; it delivered the bodies of the poor and elderly to health-care providers and equipped them with pre-paid medical cards requiring minimal out-of-pocket cost sharing. It was the worst of all possible worlds, especially with respect to the larger Medicare program because it put the entire retired population into a cost-averaged pool and laid the expense off on the payroll tax and general revenues (for Part B). Needless to say, use of health-care services thereby became utterly divorced from financing their costs, and in the process two great deformations of the state quickly emerged.

Since there was no means test on Medicare, the entire retired population became a potent political force against any patient cost-sharing measures that might have helped contain the explosion of costs owing to the third-party (i.e., taxpayer) payment system. Thus, Part B premiums for physician's services were initially set at 50 percent of costs and long ago eroded to under 25 percent, raising Medicare outlays by $100 billion annually at current cost levels. Likewise, every serious attempt to raise deductibles or co-pays in Medicare has been buried by the AARP (American Association of Retired Persons) and the other retirement lobbies.

More importantly, Medicare and Medicaid were built on a misbegotten combination of socialism for the beneficiaries and capitalism for the providers. While both programs attempt to regulate providers through utilization controls and reimbursement caps, this cumbersome and bulky bureaucratic machinery fights on an inherently uneven battlefield; that is, the K Street– and PAC-dominated milieu of Washington where virtually every medical specialty, supplier, and type of institutional medical care facility has organized representation.

The proof that Medicare and Medicaid function in the realm of crony capitalism, not market capitalism, is in the pudding. By the time these programs were up and running in 1970, combined Medicare-Medicaid costs
(including the state matching share of Medicaid) were $15 billion, or 1 percent of GDP. Thirty years later, the cost had escalated to $375 billion and 5 percent of GDP. Today the combined cost exceeds $1 trillion and will reach $2.4 trillion, or 10.5 percent, of GDP by 2022.

It goes without saying that the medical needs of the elderly and the poor did not escalate by a factor of 9 percent of GDP over the last fifty years. What happened was that the state created massive insurance pools for an uninsurable service, and then invited the medical profession to morph into Washington's greatest crony capitalist lobby. The American Medical Association, for instance, fell on its sword in opposition to Medicare in 1965, but in 2010 it sold its soul in support of Obamacare in exchange for a more doc-friendly control régime, the very thing which will cause the cost of Obamacare to explode in the years ahead.

In fact, Obamacare is the endgame of the seventy years ago carve out (from income taxation) for employer health plans. The combination of giant employer-based health cost pools and the even larger ones run by Medicare and Medicaid have not only driven health inflation skyward, but have also generated a noxious system of price discrimination that would be wholly unnatural on the free market. The so-called big buyers, consisting of large plans and managed-care operations, have extracted ever larger “discounts” (25 to 75 percent) from “rack rates” (i.e., sticker prices) for their plan participants, thereby forcing rack rates higher and higher for everyone else including small employer plans and individual insurance buyers.

Accordingly, the Obama health exchanges came about essentially because another component of the population was flushed out of the system. The self-employed and workers in part-time jobs and small businesses became the third wave of citizens needing state intervention to compensate for the original employer-paid insurance distortion. Their claims arose for the same reason as Medicare and Medicaid; namely, part-time and self-employed America was priced out of the crony capitalist health-care system in the same manner as the elderly and the poor. Yet with eligibility for state-run health exchanges under Obamacare reaching up to $90,000 per family, the cost explosion from still more health-cost averaging of pre-paid plans subsidized by the public purse is virtually unimaginable.

What is clear already, however, is that the crony-capitalist-driven health-care system is devouring the American economy, and the figures which prove it could not be more dispositive. In 1960, national health expenditures amounted to $150 per capita and hardly 5 percent of GDP. By 2000 the figures had grown to $5,000 per capita and 13.8 percent of GDP. Today it is nearly $9,000 per capita and more than 18 percent of GDP.

To be sure, these trends are widely known to the policy wonks, and
widely lamented, too. But the backstory is far less noted and is the reason that the Keynesian state in America is headed for inexorable insolvency: namely, as the free market economy continues to fail owing to the burdens of debt, money printing, and fiscal profligacy, more and more of the population will be flushed into the state-funded pools of Medicare, Medicaid, and the Obamacare health exchanges.

As the fiscal crunch intensifies, the crony capitalist gangs which fed on these pools will resist controls and cost containment with a vast mobilization of lobbying power and campaign lucre. It is the ensuing hand-to-hand combat in the corridors of Washington which will further paralyze the fiscal process; and it is the asymmetrical nature of the contest which will ultimately break the state.

SUNDOWN AND THE ENDGAME OF CENTRAL BANKING

Under a régime of sound money the prospect of fiscal deficits of $20 trillion would be unthinkable, nor would the free market be barnacled with crony capitalist coalitions which fatten on the public purse and regulatory powers of the state. Indeed, the potent purgative of free market interest rates would have kept the old prudential fiscal culture alive and provided politicians with the shield they need to impose limits, make trade-offs, and balance the fiscal accounts.

In fact, what elected officials desperately needed over the last several decades were intervals of double-digit interest rate flare-ups, even rates which reached 20 percent. High interest rate episodes are the market signal to politicians that vivify the true cost of deficit finance and thereby give them the reason to say no to tax cuts and spending increases financed with red ink.

Herein lies the real evil of the Greenspan-Bernanke régime of financial repression and wealth effects levitation: it destroyed free market interest rates in the name of monetary central planning and thereby unshackled democratic politicians from the ancient fiscal disciplines. But monetary central planning couldn't work in the long run, while the low administered price of debt turned the nation's budget into a fiscal doomsday machine.

As has been seen, the gold dollar was the true embodiment of sound finance and it was steadily strangled between 1914 and 1971. But even then there was a second-best alternative embodied in the worldview of the Federal Reserve Act framers of 1913. It was something called “mobilization of the discount rate” and was an embodiment of the injunctions of the great English banking theorist Walter Bagehot. While he is usually quoted with respect to his advice that central banks should print money freely in a financial crisis, the qualifying clauses were the more important; namely, that
the central bank should lend only against good collateral at a penalty rate of interest.

In a narrow sense, Morgan Stanley could have never brought its $100 billion of junk collateral to the Fed window in late September 2008 under the Bagehot rules. But in the larger sense, had the post-Volcker Fed adopted a mobilized discount rate policy rather than financial repression, the Morgan Stanley garbage heap could never have been created or accumulated: it was an artificial product of low interest rates and the Fed-enabled carry trade. And it was only one case, a symptom, of the financial and fiscal deformations that had spread across the entire system by the time of the BlackBerry Panic. The growing piles of federal debt and the rising heaps of Wall Street–created junk securities arose from the same profoundly misbegotten central bank policy.

Under a mobilized discount rate policy, the deformations of both Wall Street and fiscal policy would not exist. There would have been no monetary central planners to enable them and no monetary politburo to provide puts and other assurances that the nightmare of high interest rates would not be visited upon the leveraged speculators on Wall Street and the fiscal libertines on both ends of Pennsylvania Avenue.

Indeed, under a mobilized discount rate régime there would be no need for an open market committee (FOMC) at the Fed at all. Eligible banks with good collateral would come to the Fed window as a last resort, but would always prefer to obtain overnight funding needs in the interbank market to avoid paying the Bagehot penalty; that is, 200 or 300 basis points above the market. Consequently, in times of credit stress the interbank market rates for short-term funding would flare up sharply, and the Fed's discount rate would soar higher. Continuously resetting higher and higher, it would provide a profound warning to speculators that there will be no mercy on the days of financial reckoning: Greed and recklessness would be laid low.