Dr. Keynes's Health Care Prescription

by Gary North
by Gary North
Recently by Gary North: Austrians Win, Keynesians-Friedmanians Lose

"Health care in lead as stocks surge" ~ MarketWatch

This December 21, 2009 headline marks what I regard as the triumph of Keynesian dogma in the American equity markets. I can think of no headline in the last 30 years that better illustrates the triumph of Paul Samuelson, whose health care expenses finally ceased last week.

The Senate did not read the bill that Harry Reid shoved through stage 1 of the process at 1 a.m. on Monday morning. Because the Obama Administration has pressured Congress so hard to get some kind of a health-care package submitted to him, no matter what it says, Nancy Pelosi and the Democratic leadership of the House are now under tremendous pressure to accept whatever the Senate finally puts in front of it.

The Senate's version of a health care insurance package may turn out to be less damaging than the far more socialistic system proposed by the House's bill. There is no government-run health care insurance program. Because the Administration wants this bill on the president's desk by December 24, the House of Representatives will probably capitulate and agree to whatever the Senate has itself agreed to.

This is not guaranteed. It is possible that Pelosi will balk and delay the passage of the bill. If she does this, it is extremely risky. The bill may break apart in wrangling between House Democrats and Senate Democrats.

The Senate's bill is a major breakthrough for the Democrats. Hillary Clinton, back in 1993, attempted to get such a piece of legislation signed by her husband. She organized hearings related to the health care issue. That was stopped by the Republicans, and it led to the victory of the Republicans in the House of Representatives in 1994.

This will not apply to a bill that gets signed into law. Because something in the range of 30 million people will be given health insurance by the new bill, it is going to be very difficult for the Republicans to get this law repealed. Even if they win the Presidency in 2012, and also win both houses of Congress, by then the constituency will be so large and so well entrenched, that any attempt to repeal this bill in its entirety will be politically impossible.

SPEND OURSELVES RICH

Congress is hell-bent on spending America into prosperity: the Keynesian prescription for economic health. The Keynesian dogma is almost totally dominant in political circles, banking circles, and academic circles. This has been true for 60 years, but now the bills are coming due.

The bills are now coming due so fast, and in such large numbers, that the only thing that can keep the game going is the expansion of the money supply by the Federal Reserve System. The FED has been expanding the monetary base since mid-June at a rate of 77% per annum.

The monetary slowdown from December 2008 to June 2009 is now over. The FED doubled the monetary base in two months in September and October 2008. Now it is moving back into a full-scale policy of monetary expansion. We have never seen anything like this in the history of the FED, not even in World War II. We now face an endless stream of debt and expenditures, as far as the eye can see. These expenditures will increase as the population ages. Everyone knows this, but nobody wants to face it. Keynesianism is dominant as never before in my lifetime. The respite under Chicago School monetarism, from 1975 until 2000, is now over. The stock market rose in response to the promise of some kind of a bill being signed by the President. The justification is that the health care sector will rally.

The health care sector will do well. It is going to receive massive amounts of money from businesses. This is a classic case of the broken-window fallacy. The repaired window looks great. The wealth that was lost to fix it is not seen.

Investors do not ask: "What would the money to be spent on health care have done for the rest of the economy?" Why not? Because they are Keynesians.

Other private sectors will not be funded to the extent that the health care sector is funded. The money that flows into health care will not overflow into all other segments of the economy. It will flow out of them into health care. Health care will expand at the expense of the rest of the economy.

The additional money spent on health care will help some sick people be a little better off, but the people who will get treatment will do so by way of those people who will not be able to afford to buy whatever it is that they would have bought with the money taken away from them.

The recipients will be poorer people – not the truly destitute, who already have access to free hospital care by Federal law. There are some winners in every wealth transfer system. There are far more losers, but they do not understand this in most cases. They see the repair of the broken window – in this case, medical treatment – but they do not count the cost to themselves and others. They do not see the improvements in their lives that the confiscated money would have achieved.

WHY HEALTH CARE DOES NOT DRIVE THE MARKET

Health care is the pawn of government power. The infusion of more money into health care should raise two questions:

1. Where will the money come from?
2. At what cost?

Those investors who rushed in to buy stocks in general because of health care in particular are Keynesians. They believe that the government can produce wealth in general by robbing many Peters in order to pay a few extra Pauls.

Why should a sector that provides health care lead the recovery of the entire economy? To defend this logically, the economist should say that there will be enormous gains in overall productivity due to the recovery of those sick people who will now receive health care payments and who would not otherwise have recovered.

Are these sick people otherwise spectacularly productive? Will their newfound health at the margin serve as the engine of national productivity? No. Why not? Because they are people with minimal productive capabilities, which is why they could not find jobs that provided health care insurance.

Then why should we expect the entire economy to rise as a result of Harry Reid's as-yet unread 1,000-page health care bill? We shouldn't. But we are told by headline writers that the unread bill is the source of stock market gains.

This is Keynesianism with a vengeance.

We should try to identify those sectors of the economy that provide widespread economic growth. Health care does not provide economic growth, except insofar as someone is made healthy who would not otherwise have re-entered the work force. But who are these people? We do not know, because no one has read Reid's bill. It was passed at 1 a.m. on Monday morning.

Some proposed beneficiaries: illegal immigrants, or people with very low paying jobs, or unemployed people.

So, the stock market is responding completely in terms of Keynesian presuppositions. Keynesianism assumes that there is such a thing as a free lunch. It assumes that money that comes from the private sector by way of the Federal government is not going to have a negative effect on the formation of capital.

FREE HOSPITAL LUNCHES

The assumption is that it will be possible for the government to mandate that businesses pay enormous amounts of money to the health care sector, and yet the health care sector will not drain productive capital out of the other sectors.

This is the essence of Keynesianism. This is the essence of the futility and error of Keynesianism. This has been the central error of Keynesianism ever since John Maynard Keynes invented the system back in 1936. It assumes that the Federal government can get its hands on enormous quantities of money, and spend that money on particular favorite sections of the economy, without imposing losses on all the other sectors, which will have to pony up the money to provide benefits for those inside the favored sector of the economy. We are therefore living in a society in which there are no further meaningful intellectual or moral restraints on spending by the Federal government. The government is going to be allowed to spend whatever amount it wants on whatever programs it wants, whenever it wants, because stock market investors are convinced that the more money the government spends, and therefore the larger the deficit of the government, the better it is for the overall economy.

Stock market investors go looking for a particular sector of the economy that will benefit as a result of the transfer of funds. They take the optimism that they have for these limited sectors of the economy and extend this optimism toward the entire economy.

Investors in stocks assume that there really are free lunches. These lunches are made available, in effect free of charge, by the Federal government and by businesses that are operating under the terms the Federal government has established for them.

Anyone who challenges this outlook is regarded as a doomsayer. He is regarded as a crackpot. He is regarded as someone who is out of touch with the basics of modern finance, and who is therefore out of touch with the theoretical presuppositions that were laid down by John Maynard Keynes back in 1936. It is assumed that anyone who calls into question the Keynesian miracle of stones and bread is some kind of intellectual heretic.

So, when the economic breakdown comes, the Keynesians are going to be called into question, but not until it's clear that the anti-recessionary measures have not worked.

The effect of the health care law will be to increase unemployment. Businesses are going to find that they cannot afford to hire marginal workers, and they are likely to fire marginal employees. So, the desire of the Obama Administration to get the unemployment rate down is going to be thwarted by the success of the Administration in getting a health care bill passed.

The expenses are going to be imposed immediately, but the Senate bill is not going to provide complete coverage for four years. This is why John McCain has called the bill an exercise in Bernard Madoff accounting. That was a pretty good sound bite. It really does describe Medicare, but it especially describes one in which the payoff is going to be delayed by four years after the money is collected.

Under a regular Ponzi scheme, the early investors are paid off rapidly. Under Reid's scheme, the contributors are going to find that nothing comes back to them for years. Their budgets will be curtailed extensively by the cost of providing Medicare to the 30 million Americans who are not presently covered.

Voters think that Uncle Sugar is going to provide medical care for the public. Voters who ridicule a few faith healers, who operate on the fringes of the Protestant majority, are going to find their faith in the Federal government to provide healing is a lot less rational and a lot more expensive than faith healers. Faith healers explain healings in terms of God, who is not under the restraints of fiscal budgets. How do Keynesians explain a healed economy? There is no magic powder that is going to provide health care on inexpensive bases to an additional 30 million Americans. It was bad enough that the initial Senate bill proposed to drop Medicare age qualification from 65 to 55. That really would have busted the government's budget. So, the Senate did provide a kind of stay of execution, but not by much.

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THE WELFARE STATE'S UPWARD RATCHET

When the public finally realizes that it has been taken for a ride, it is going to find that Congress is unwilling to roll back the law that Republicans are going to complain against throughout 2010. There will be political hay made by non-incumbents who complain about the high costs of the health care program, but if and when they come in office, the voters will find the Republicans do not have the votes to completely abolish whatever law the President signs. They may be able to tinker with marginal issues in that law, but they will not have the votes to roll it back.

A constituency of 30 million people is a large constituency. At the margin, it is an enormous constituency. The Democrats know this. The Democrats know that if they can get this bill into law, the Republicans will never have the political fortitude to roll back the whole bill. They know that from this point on, the United States is going to be saddled with the first stage of socialized medicine. All the Democrats have to do now is bide their time.

This is why there is a ratchet for the welfare state. Every time the Federal government increases benefits to some special-interest group, it creates a constituency in favor of retaining the law that created the constituency. It takes something like political revolution in order for a subsequent Congress to do anything more than tinker with certain embarrassing aspects of the law. They can revise around the edges, but they never roll it back completely. We do not see a case like the repeal of the 18th amendment. Once again, we have moved down the road toward political centralization and the socialization of the American economy. This is done by increments.

The result is going to be the bankruptcy of the Federal government. At some point, the checks are going to stop coming from Washington, or else the money in which the checks are denominated is going to buy less and less.

Congress is unable to control itself. It is like someone with an incurable disease. A person cannot stop the progress of the disease. We are watching the St. Vitus' dance of America's political establishment. They simply cannot say no to more spending.

CONCLUSION

I regard this bill as a victory for the Administration. It is not so great a victory as Obama would prefer, but he is going to sign the bill into law. If he gets this law, he will be able to say that he achieved the number one goal in his presidential plans.

He has bet his political future on his ability to push through Congress a health-care insurance bill. He will be able to go to the voters and say that he accomplished this.

The question is, of course, whether a majority of voters are going to think that this is worth re-electing him, especially when they find out how much money this bill is going to cost them. The health care law is going to be very expensive. Individuals are going to wind up paying fines or paying to enroll in insurance programs that are expensive and which individuals don't want to buy today.

We don't know how bad it's going to get, and we don't know how high the bill is going to be, but we can be sure that the bill will be high, and much higher than projected by the official estimate. Medicare vastly outran the promised maximum promoted by President Johnson in 1965.

This is always the price of Keynesianism.

December 23, 2009

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2009 Gary North

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