Saturday, July 17, 2010

Health Care Reform Will Help Everybody

By Barbara O'Brien

Many Americans assume the new health care reform act will benefit mostly the poor and uninsured and hurt everyone else, according to polls. As Matt Yglesias wrote, “Basically, people see this as a bill that will take resources from people who have health insurance and give it to people who don’t have health insurance.” Those who still oppose the reform say that people ought to pay for their own health care.

We all believe in the virtues of hard work and self-reliance, but these days it’s a fantasy to think that anyone but the mega-wealthy will not, sooner or later, depend on help from others to pay medical bills. And that’s true no matter how hard you work, how much you love America, or how diligently you take care of yourself. The cost of medical care has so skyrocketed that breaking an arm or leg could cost as much as a new car. And if you get cancer or heart disease — which can happen even to people who live healthy lifestyles — forget about it. The disease will not only clean you out; it will leave a whopping debt for your survivors to pay.

And the truth is, we all pay for other peoples’ health care whether we know it or not. When people can’t pay their medical bills, the cost of their health care gets added to everyone else’s bills and insurance premiums. When poor people use emergency rooms as a doctor of last resort, their care is not “free.” You pay for it.

Another common fantasy about medical care is that the “free market” provides incentives for medical companies to develop innovative new drugs and treatments for disease without government subsidy. It’s true that private enterprise is very good at developing profitable health care products. But not all medical care can be made profitable.

For years, the U.S. government has been funding medical research that the big private companies don’t want to do because there is too much cost for the potential profit. This is especially true for diseases that are rare and expensive to treat. An example of a recent advance made possible by government grants include new guidelines for malignant pleural mesothelioma treatment developed by MD Anderson Cancer Center researchers. Another is a blood screening test developed by mesothelioma doctors like thoracic surgeon Dr. David Sugarbaker. The health reform act provides for more dollars for such research, from which even many of the tea party protesters will benefit.

The biggest fantasy of all was that people who had insurance didn’t have to worry about health care costs. But the fact is that in recent years millions of Americans have been bankrupted by medical costs, and three-quarters of the medically bankrupt had health insurance. And yes, insurance companies even dumped hard-working, law-abiding patriots. But the health care reform act will put an end to that, and now America’s hard-working, law-abiding patriots are more financially secure, whether they like it or not.

Friday, July 09, 2010

The irrelevance of the Scandinavian model

With America in crisis, there is a lot of talk about the alternatives to the American way. Even within America, people have begun to sit up and take notice of the way things are done in Western Europe. And some look wistfully towards the more egalitarian model of the Scandinavian countries.

As an outsider, and as an Indian, here are my thoughts about the Scandinavian model being the sensible way forward, in preference to the “crisis-exposed” American way.

At the outset, I must confess to some prejudices in favour of America. The fact is, even as I live out my life thousands of miles away from both America and Scandinavia, not a day passes when I am not grateful to America (and to Americans) for some aspect of my life that is now infinitely better thanks to their talent and creativity. I really cannot say the same for Norway, Sweden, Denmark or even Finland. (Disclosure: I make use of a Nokia cell phone but not Ikea furniture; I do not drive a Volvo car and have never been the recipient of a Nobel Prize.)

To begin with, the Scandinavian model of a comprehensive “cradle-to-grave” welfare state is financed by high levels of taxation with a steeply progressive income tax regime.

In terms of ethnic composition, these are all very homogeneous societies and generally closed to immigrants, especially from the third world. Therefore, citizens who pay out large amounts of taxes always have the implicit assurance that the benefits are going to their own countrymen. (Think of the reaction if India becomes a welfare state and word gets around that Bangladeshis are flocking in to claim benefits here.)

Besides, all these countries consistently rank as the top performers in the various surveys about levels of corruption, transparency and the efficiency of public services. Therefore, taxpayers in these countries have the further assurance that the money they pay is actually being put to good use, and not lost to waste and graft. In turn, this means there is far less resistance to the idea of paying more taxes.

It will now be obvious that the conditions existing as above are not those that can easily be replicated elsewhere. The model may therefore have less relevance for America and almost none for India.

From India’s point of view, there is the other issue that being an expensive model, it presumes the existence of a prosperous majority who can then pay for those who fall behind. In fact, any welfare state presupposes a minimum level of prosperity; you cannot go about building a welfare state on a foundation of unrelenting poverty. That should take India out of the picture (for the foreseeable future, at least) as far as following the Nordic footsteps go.

As for America, despite all the evidence of heartlessness in its workings, there is something special about this country I have only recently come around to appreciating. This is the idea that the idea of America is not just for the Americans, it is for every one of us.

In America, it’s called the “American Dream”. We know for a fact that this is not a carefully put up mirage meant to lull and buy peace with its underprivileged. Examples abound of people rising from the dirt and living the dream. And perhaps the most wonderful thing about the American dream is that it is open, in some degree or other, to just about everyone around the world. We know of so many ordinary folks in our own midst, born into modest circumstances and now living the dream in America.

As for the Scandinavian model, the last time I checked, I did not come across a “Scandinavian Dream”. And if there is one I happened to miss, I know for sure it’s not meant for me, my family, or my friends.

Critics make the point that for a wealthy country America’s social indicators are well behind those of its peers. There is a reason. When you have been letting in millions of the dirt-poor from all around the world, and with many millions more having let themselves in, averages—and social indicators are, after all, averages—are bound to suffer. A classic example is Germany today. During much of the eighties, West Germany was among the top European countries in terms of GDP per person. These days, Germany figures behind Britain and pulls in behind even Ireland. So, did the German economic miracle run out of steam? Not quite. In 1989, Germany let in about 17 million of its poor cousins from the former East Germany and the average has been depressed since then.

This is not to deny that the Scandinavian model takes good care of its own citizens. The American model takes less good care of its own citizens, but it also cares for millions of poor from around the world who were allowed in with honour and dignity. Every year, nearly one million immigrants to the country are granted American citizenships. This is over and above the fact that all children born in America, even to foreigners and illegal immigrants, are ipso facto American citizens.

The choice then is a no-brainer. If you happen to belong to one of the Scandinavian countries, yes, yours is the way ahead. For the rest of the world, it is the American way that holds promise.

And then, when you think of a Swede, a Norwegian, a Dane or a Finn, you think blond, and you think blue eyes. Think of an American, and you suddenly realize you just cannot think along these lines. To me, that is the explanation why the American Dream has such a powerful resonance across the world.

(This blog post was originally posted on another of my blogs in January 2010)

For a friendly EMI

(This article was published in the Open page of The Hindu dated November 22, 2009 and is available at the link:

One of the reasons why ordinary people who survive on salaries have ended up borrowing so much from banks and financial institutions is the simplicity of the repayment mechanism that goes by the name “EMI”, i.e., Equated Monthly Instalment.

The EMI is a fixed payment amount made by a borrower to a lender at a specified date each month. It is used to repay both the interest and the principal each month so that over a given time period, the loan is fully repaid. In practice, the early instalments repay more of the interest component with the later instalments taking care of the principal amount. The advantage with the EMI is that the borrower knows exactly how much is to be paid towards the loan each month and this makes the personal budget easier to manage. When you get your monthly pay-cheque, you also pay out the EMIs on all the loans you would typically have taken, from the now mandatory home and vehicle loans to the sundry personal loans.

However, as much as the EMI has simplified the business of borrowing and repaying, it also wields an unwelcome and unyielding hold over your finances. The cheques have to be paid on the dot, month after month, no matter what contingencies stare you in the face. If the cheques bounce, you pay more by way of charges and penalties. Salary earners get paid roughly the same amount each month. But, anyone who runs a household would know that expenses are just not the same over the months. It could be the start of a school year when so much extra fee is to be paid out, or a festival like Deepavali when money goes up in smoke, as it were. In the West, this could be the extravagance of the Christmas shopping season or the annual vacation.


Here, then, is a suggestion. Instead of insisting that EMIs be paid religiously every month, the banks can offer a “flexi-EMI” plan, where the borrower is allowed the right to default in one month of his choice every year. In return, the EMI amount will be proportionately increased so that the remaining 11 months will together amount to the annual repayment obligation. For instance, if your current EMI is Rs.1,100 a month, under the revised plan you will be required to pay Rs.1,200 a month for 11 months. The annual repayment in either case amounts to Rs.13,200, but the borrower will now be free not to pay anything during the one month — when you expect your finances to be under strain.

This is the basic plan, and from this starting point, variants can be devised. Thus, if for any reason someone wants a two-month default or “vacuum” option, it can also be worked out. Another version would be to offer the product in two options, one allowing a fixed month vacuum where the month in which the EMI is skipped is pre-defined and the other being a variable month vacuum option, where the borrower is free to choose when to skip repayment. Obviously, the second option will be priced a little higher because a beginning-of-the-period default has a higher interest burden.

Simplicity has a lot to do with why the EMI has become so popular. In that sense, the advantage with the changes I have suggested here is that even as the simplicity is retained, the customer is offered an additional convenience at no extra cost.


Thursday, July 08, 2010

America's secret competitive advantage is a dirty secret

What follows is the abstract of a paper I have e-published as a research paper on the website of RePEc (Research Papers in Economics). The full text is available at the link below:


The noted management guru Michael E Porter identifies seven unique competitive advantages for the U.S. economy to explain the country’s pre-eminence; they range from (among others) its environment for entrepreneurship, its institutions of higher learning, its technology and innovation machine, to its commitment to competition and free markets.

In this article, I argue that there is another critical competitive advantage exclusive to the U.S. that arises from its electoral system characterised by consistently low levels of voter turnout in national elections and with disproportionately large numbers of its poorest and least educated citizens not voting. I begin by looking at reasons why the poor in America vote in far lesser proportions than their numbers, and particularly, at the various formal and informal impediments that prevent voting by the poor. I then consider the impact this would have had on America’s economy and its competitiveness.

The core idea of this paper is that when an electoral process effectively filters out significant sections of the poor, the country would find it far easier to put in place (and sustain) sound free-market economic policies focussed on long term objectives with generous incentives for creation of wealth and with a tight leash on welfare and other entitlement programmes. I contend that America’s undeniably greater acceptance of the rigours of the free-market system is not (as is commonly believed) a product of a unique history or culture but, in truth, is closely tied to a discriminatory and exclusionary electoral system that has strong historical roots.

India's inflation problem and the elephant in the room

There's a lot of talk in the Indian media about why inflation should be so high and the general consensus seems to be that last year's poor monsoon is the culprit.

Is there an elephant in the room here that we all refuse to see? I mean, isn’t there a link between the high inflation that we are seeing now (particularly food inflation) and the recent vastly increased outlays on social “welfare” schemes? Is it not best understood as the reverberations from that chest-thumping moment in parliament when finance minister Pranab Mukherjee declared so grandiloquently that for the first time, India's budgeted expenditure would cross Rs.100,000 crores.

Take the example of all that money going down the NREGA drain. This has the immediate effect of injecting a lot of extra purchasing power into the economy without doing much on the output side (neither the short nor the long term). Naturally, inflation follows and this should be a no-brainer. And if you look at the kind of activities financed by the NREGA, they are actually not very far from simply digging trenches only to have it filled up the next day (all in the name of “employment generation”).

A while back I read a news story purportedly about the “success” being achieved by the NREGA. It mentioned that farmers in Punjab were facing a shortage of labour to harvest their crops because of a slow-down in the hordes of seasonal migrants from U.P. and Bihar that earlier used to turn up for this kind of work. And this was because the NREGA, by providing them work near their villages, had made the trip to Punjab less worthwhile. Yes, this is heart-warming stuff.

Unfortunately, economics has very little time for warm hearts. What is actually happening is this. Instead of doing economically productive work (harvesting crops), labour is being diverted into unproductive work (digging trenches), and getting paid in the bargain. It pushes up the costs for Punjab farmers, which invariably finds its way to the government in the form of higher minimum support prices, and it does nothing to increase output in the economy which might otherwise have absorbed the extra purchasing power created. Costs have gone up, output is stagnant, and at the same time, people have more money in their hands.

And this is just so much about what has happened. What is in store for us is perhaps even worse. Wait till the Food Security Bill and its promise of food grains at Rs.2 (or Rs.3) a kilo becomes law. The government will then necessarily have to acquire a lot more rice and wheat from the market for supply to the “poor”. A lot of it will get pilfered or wasted in the logistics and in the hands of the end-user (knowing what happens to things given away for free), and importantly, it will also cut down on the supply available in the open market for purchase by our “aam aadmi”. At this point, it is simple demand and supply.

Anyone who has a doubt about what I have just said should feel free to look up the inflation rate in Venezuela where our Comrade Chavez has lately been into a lot of social “welfare”.