This week’s Head to Head debate between Watcher’s Council members is:

Resolved: It is better, politically, for conservatives to allow a government shutdown if Democrats refuse to embrace massive spending cuts or to compromise for a lesser amount of cuts in order to keep the government running.

The participants are The Noisy Room for the affirmative and Council alumnus Soccer Dad for the negative.

The “Theory of Everything” in theoretical physics is a hypothetical way of explaining and integrating all physical phenomena. Maybe I’m misreading it but this paper appears to be an economic theory of everything and it doesn’t look to me to be good news. A snippet:

Each passing month brings wider and deeper global economic imbalances accompanied by what we perceive to be a general misunderstanding of their cause and impact. The source of these imbalances is the global monetary system. It continues its trend towards demise, as it must, and current events indicate an acceleration of this trend.

The current monetary paradigm was structured and developed the twentieth century by liberal democracies for liberal democracies that, through unified sovereign management and coordination, controlled the perception of value and how the free world would account for it. The system was not structured to accommodate the dynamic shifts in global economics, trade incentives and political alliances brought about, ironically, by the consequences of democracy’s triumph and the emergence of large, formally closed economies into the global economy.

Serious consideration as to the inadequacy of the current ‘me has not been addressed since the onset of credit weakness in 2007, which was and remains a manifestation of a broader currency problem. Widely differing economic incentives and political agendas in developed and developing economies further suggest that a new, unified monetary system is highly unlikely without substantial friction first.

Read the whole thing.

Hat tip: Barry Ritholtz

Writing in the WSJ blog Patricia Minczeski makes the following remark about the chart on the left:

U.S. wages as measured in the Labor Department’s employment report have been largely stagnant over the past few months, despite improvements in the job market. In fact, many industries saw more wage growth during the recession than during the recovery.

which I interpret as finding it a curiosity or a paradox. Arnold Kling responds:

I imagine that Scott Sumner would suggest looking at causality the other way. That is, wages rose too much during the recession, causing unemployment. The slowdown in wage growth, combined with easier monetary policy and higher prices, is what has produced the recovery.

My initial reaction to this was that it reflected something about the state of economic journalism but on reflection and consideration I realized that a) it stood to reason and b) not only does it say something about economic journalism but about economists as well.

In many if not most businesses pay is based, at least in part, on seniority. This may not make sense from an economic standpoint (or it may) but it is the way things are done. And employees are typically laid off or terminated on a last in-first out basis, laying off the least senior and, consequently, lowest paid workers first. That means that total payrolls would decline while average wages increased or, said another way, exactly what the chart is telling us.

That’s true for both salaried and hourly employees. So, for example, paragraph after paragraph of UAW contracts are filled with complex rules for determining seniority and compensating more senior employees at higher rates.

There’s something else that I think should be pointed out. Whether it makes sense for an employer to add employees or not is not based on wages but on compensation. Healthcare premium costs have been rising at about 5% per year throughout the recession. Let’s say the wages for an employee are $50,000 and, in addition to wages, the employee has an employer-paid family healthcare plan (decreasingly likely these days). At the start of the recession a family healthcare plan cost about $12,000. They’re now nearly $14,000 per year.

That means that the approximate compensation for that $50,000 a year employee was around $62,000 in 2007 and is about $64,000 now even if that employee’s base pay didn’t move a bit. That’s a pretty sizeable jump. And here’s a key point: neither the employer nor the employee is a bit better off for that increase.

Actually, it’s a lot more complicated than that. For one thing most large employers are self-insuring. That makes it pretty hard to calculate what they’re actually paying for employee health costs. But it gives you the general idea.

So, if you’re wondering why employers aren’t taking on new employees makinhg the median wage or below, one of the places you’ve got to look is healthcare costs.

While I’m making a few quick links you owe it to yourself to take a look at this analysis of the last 10 years for the U. S. economy in charts. Here’s a Reader’s Digest summary (if you don’t like charts or don’t have the patience to page down):

• Employment is about where it was in 2003.
• Government jobs are up 4% and private down 1% over the decade.
• The sectors that have gained the most jobs are healthcare, education, and temps (temps in the last year).
• The sectors that have lost the most jobs are construction and manufacturing.
• Population has grown 9%, jobs have flat-lined.
• Those 55 and above are holding on to their jobs longer (a prediction I’ve been making for the last 30 years)
• Those 55 and above have seen the largest pay gains.
• The highest 20% of earners take home about half of all the pay and that hasn’t changed appreciably over the last 10 years.
• The top 10% of earners have tripled their net worth, the bottom 50% are about the same.
• Investors are moving away from risk and towards safe returns.
• The Austrian True Money Supply has risen sharply.
• The dollar has declined.

Check it out.

For a really scathing condemnation of the Ryan budget proposal, don’t look to the Democratic objections which fall along the expected lines. Consider this critique from a more libertarian, small government perspective from Mish Shedlock:

Flat out, Ryan’s proposal is no path to prosperity. It is a step in the right direction but the best we can say about it is that it delays bankrupting the nation.

Republicans need to take another look at Ryan’s assumptions on growth, on jobs, on interest on the national debt, on military spending, on shared sacrifice, and on the idea that budget projections 30 years from now make any sense .

Ryan’s plan may be far better than Obama’s but neither plan is a “Path to Prosperity”.

Read the whole thing.

Update

Another libertarian critique of the Ryan proposal, this time from Nick Gillespie and Veronique de Rugy. In brief, it punts on Social Security, the timeline for bringing the budget into balance is too long, and a more basic philosophical problem:

Which brings us to the major flaw in Ryan’s budget: He doesn’t rest his reform of entitlements on a fundamental understanding that not everyone should be receiving govenment money. Even as he pushes to reform Medicare, for instance, he emphasizes continuing its universality for retirees. The two of us believe it is society’s responsiblity to care for the neediest and poorest among us. But it’s not society’s responsiblity to take care of middle-class and wealthy individuals who have the means of doing so for themselves (as David Stockman told one of us recently, all government benefits should be means-tested). By failing to make this distinction, Ryan sets his plan up for political failure. When his plan was scored by the Congressional Budget Office, the CBO noted that under his reforms most Medicare beneficiaries would have to pay more for their health care costs. That’s not only mathematically correct, it’s morally correct. There is simply no reason that relatively well-off seniors shouldn’t pay their own way. That would allow the government to take better care of those actually in need while reducing overall tax burdens on the economy. Similarly, while we think Ryan is absolutely correct about block-granting Medicaid, at least that program is specifically geared toward helping the poor. The same cannot be said about Social Security and Medicare, which suggests reforming those programs should be the highest priority when it comes to entitlements.

Tyler Cowen has several of the same reactions to Cong. Paul Ryan’s proposed strategy for Medicare reform that I did yesterday. See especially #8

8. As I’ve already blogged, the vouchers idea won’t help cut health care costs.

and the first part of #10

10. There’s not nearly enough on reforming the dysfunctional supply-side of our health care institutions.

James Kwak is much more critical:

There are two ways that government spending on health care can go down. Either health care itself is getting less expensive, or the government is just paying for less of it. Hint: it’s not the former.

“A private health insurance plan covering the standardized benefit would, CBO estimates, be more expensive currently than traditional Medicare. Both administrative costs (including profits) and payment rates to providers are higher for private plans than for Medicare. Those higher costs would be offset partly but not fully by savings from lower utilization. . . . Moreover, CBO projects that total health care spending for a typical beneficiary covered by the standardized benefit under the proposal would grow faster than such spending for the same beneficiary in traditional Medicare under either of CBO’s longterm scenarios.”

So instead, what’s happening is the government is just paying for less health care. It’s doing this because the vouchers are designed to grow in value more slowly than the cost of health care. That’s where all of the cost savings come from.

Think about it. Does this accomplish anything? Yes, we have added a positive amount to the government’s fiscal balance. But we have done it by taking a larger amount from our aggregate household fiscal balance.

According to the CBO in the current fiscal year roughly $1 trillion of healthcare spending will come from federal tax revenues and federal borrowing (another way of describing federal spending). That’s about 7% of GDP from federal government spending on healthcare alone. Real GDP is roughly what it was a decade ago. Healthcare spending is growing at roughly 5% per year. Assuming no real GDP growth, here’s what the federal share alone of healthcare spending would be at different rates of growth as a percentage of GDP:

and that’s ignoring demographic changes which will almost certanly cause federal healthcare spending to be higher than that. Such is the magic of compounding.

Giving some individuals choices (remember: the Ryan proposal exempts those over 55 from the proposed reform) will not cut costs. Unless you assume that healthcare providers are willing to take a voluntary pay cut, they will potentialize those who are willing to pay and that will increasingly be those who are covered under old-fashioned Medicare.

Although you can reduce the federal government’s long term (i.e. over 30 year) liability as a result of healthcare spending by using the approach in the Ryan proposal, you can’t cut costs while preserving reasonable standards of public health that way. And you will increase federal spending on healthcare over the next 10 to 20 years as Tyler Cowen points out and as I’ve illustrated above.

Yes, there is a Medicare and healthcare crisis. It is probably already too late to deal with it and preserve the general contours of the present system. And the longer we wait to deal with it the more it will have choked from our economic growth.

As should surprise no one, having failed to deal with the most pressing challenge in reforming our healthcare system in the first round of healthcare reform last year, the second round has begun. Wisconsin Republican Congressman Paul Ryan has fired the opening salvo with a proposal of his own for controlling Medicare costs:

Starting in 2022, new Medicare beneficiaries will be enrolled in the same kind of health-care program that members of Congress enjoy. Future Medicare recipients will be able to choose a plan that works best for them from a list of guaranteed coverage options. This is not a voucher program but rather a premium-support model. A Medicare premium-support payment would be paid, by Medicare, to the plan chosen by the beneficiary, subsidizing its cost.

In addition, Medicare will provide increased assistance for lower- income beneficiaries and those with greater health risks. Reform that empowers individuals—with more help for the poor and the sick—will guarantee that Medicare can fulfill the promise of health security for America’s seniors.

Here’s how David Brooks characterizes the plan, which is only one component of a much more sweeping proposal for spending reduction in Washington:

The Ryan budget doesn’t touch Medicare for anybody over 55, but for younger people it turns it into a defined contribution plan. Instead of assuming open-ended future costs, the government will give you a sum of money (starting at an amount equal to what the government now spends) and a regulated menu of insurance options from which to choose.

Equally unsurprisingly the plan is being called “radical”.

The rising costs of Medicare and Medicaid are not merely a Republican bugbear. Last week the CBO (again, unsurprisingly) announced the last round of healthcare reform will cost more than the original estimates.

Tyler Cowen presents some reasons why Cong. Ryan’s approach to cost control may not be effective:

1. Individuals have serious misconceptions about the science, or the badness of a particular condition, even in light of government or other third-party advice. Or perhaps individuals simply do not understand the nature of all of the choices at hand.
2. Perhaps an individual will choose “no coverage for lung cancer,” but the government cannot precommit to the outcome of no coverage. Of course as cost control becomes more pressing, we’ll have to learn precommitment for at least some issues, one way or the other, so this cannot be a decisive objection. The entire premise behind the discussion is that we cannot cover all treatments through government subsidy.
3. Over time, perhaps a government Board can rebalance the mix of coverage better than an individual can. People age, possibly lose some mental faculties, science advances, costs change, and so on.
4. Those are good arguments. They are good arguments for a mixed system. They are not good arguments for ruling out all individual choice of benefits. They are not good arguments for ruling out a scenario like that outlined in the first paragraph of this blog post.

To determine whether the Ryan plan can succeed we might want to start by defining success. I would define success as an approach that reduces healthcare costs while preserving reasonable standards of public health. I see little reason to believe that the plan will succeed by that definition. However, if your definition is “reduce the future healthcare liabilities of the federal government” if fully implemented it might well succeed.

In bullet point form here’s why I don’t think the Ryan plan will succeed by my definition of success:

• For a market-based plan to succeed (presumably the reason for its emphasis on individual choice), there must be a market. There is no market in healthcare.
• The plan deals only with the demand side of the equation and patients aren’t the only ones responsible for creating demand in healthcare. Providers create their own demand.
• There’s a supply problem as well as a demand problem.
• There are both frequency (number of procedures performed) and amplitude (cost per procedure) problems in healthcare. Healthcare costs are the sum of the individual cost per procedure over the total number of procedures performed. To control costs we must constrain both.
• The Ryan plan does nothing to constrain costs other than limiting how much the federal government will pay.
• Continuing to cover those over 55 under the present system means that the cost problems of the present system will be with us for thirty years or more.
• That deadline is likely to cause the present system to be potentialized, i.e. costs for Medicare may rise faster as a consequence of the Ryan plan than they otherwise would.
• We can’t wait 30 years for costs to be brought under control. Healthcare is already 17% of the economy (with the federal government paying about $1 trillion of that). It is on track to comprise more than 20% of the economy within a few years.
• The list goes on.

The Watcher’s Council, of which I am the member with greatest longevity (I replaced Joe Gandelman of The Moderate Voice about five years ago), has begun a new recurring feature, “Head to Head”, in which Council members debate issues of the day. I think the feature has real potential and is easily the most exciting initiative of the Council in some time.

The first topic, an incendiary one, was “Resolved: that articles of impeachment should be drawn up against President Obama for his intervention in Libya”.

The second, in which I took the affirmative, was “Resolved: that the Obama Administration acted rightly in repealing Don’t Ask, Don’t Tell”.

The Watcher’s Council has announced its winners for last week. First place in the Council category was Kiwi newcomer New Zeal’s “Responsibility to Protect” – The End of National Sovereignty As We Know It?. I, too, find the United Nations R2P resolution troubling. It is either a formula for unending war or a figleaf for paternalism and neocolonialsm.

First place in the non-Council category was Sultan Knish’s with Saving 1 Billion People From Themselves.

You can see the full results here.