The Tipping Point
This post is a continuation of my last article on consumer driven health care.
The U.S. Department of Labor issued some interesting statistics last week, one of which was a graph showing the intersection of two lines. This intersection illustrated that the number of Americans represented by public sector unions now exceeds the number of organized private sector employees. This reveals the reality that while private sector employment is shrinking, government is a growth business, and it is a precursor to the potential of total public sector employment rivaling or exceeding that of the private sector.
So what? Well - the inevitable outcome of all this is that the cost of employment for an ever increasing number of people will be funded by an ever decreasing number of people. It is an actuarial equation that simply cannot be sustained. It is the same equation that led me to predict in 1997 that GM would be bankrupt within fifteen years; a statement that earned me gales of derision and laughter at that time. No one is laughing anymore, as the prediction came true even faster; the deep recession in the auto industry hastening (not causing) GM's demise.
It matters not what your politics are, who you voted for, or who you plan to vote for. It is well beyond that, for things have reached a tipping point. What matters is that the laws of economics are immutable and will not be mocked. They are routinely ignored but they cannot be suspended. They operate independent of whether or not we like them, agree with them, or recognize them.
As the ranks of those employed by government swell, so too does the aggregate cost of the health care plans in place to cover them. The total cost of health plans provided by public sector employers is significantly higher than the cost of comparable plans in the private sector (after its massive bail out, I no longer consider GM a private sector company). There are multiple causes of this, but the primary one is that public plans are insulated from market forces, and rely on models of use and delivery nearly forty years old.
This matter of public health insurance plans is the iceberg below government's financial water line. The good news is that the tenets of consumer driven health care offer can offer some assisatance.
Keep an eye on this graph - it has enormous implications.
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Tom- I would have guessed Smith and should have surmised von Mises. Thanks for the offer on Human Action, but I am familar with von Mises through the Institute web site and my undergraduate work. I do struggle with the concept of economic laws...versus, say the laws of physics. But that's just me.
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Swan - The two giants of economic thought to me are Adam Smith and Ludwig von Mises. Mises was an Austrian scholar and economist who wrote prolifically in the first half of the 20th Century. His seminal work was an enormous treatise entitled, Human Action. I own a hardcover copy and you are welcome to borrow it if interested. To me - it is irrefutable in its comprehensive totality and its reasoning. I own a copy and you are welcome to borrow it if interested. I refer to several laws above, one of which is that an entity's cost cannot indefinitely remain greater than its revenue without significant consequence. GM's cost WAS significantly greater than its revenue for many years. It was able to ride out that storm because it had an enormous horde of cash accumulated from its halcyon days. But as enormous as it was it was finite, and we have seen the inevitable consequence.
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Tom, I'll be glad to chat with you sometime! Call/email me and we'll set it up.
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Tom and Scott a most interesting 'to & fro' (please allow us follow along) and dbeardda your observation was much more than nitpicking.
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Scott - Of course I want those people fairly compensated, and I am as familiar with all of the relevant labor law, negotiations, and the issue of comparables as you are. And this cetainly goes well beyond the two employment groups you mention. It is the design of these plans that is of concern. The opportunity for savings is enormous, and those savings could be shared by both provider (to maintain services) and users (to maintain quality of care). Talk of dispatching fire trucks from Bejing does little to clarify the discussion. The beginning of the debate is to consider credible alternatives. If the design of the plans were more similar to what I described in my first post, would there not be enormous savings? How about we spare the readers this to-ing and fro-ing and have a cup of coffee some Sat. morning? I'll buy.
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Scott, I concur that in many arenas unions have outlived their usefulness. When you could lock children up in a burning sweatshop, organized labor served an essential and justified purpose. The idea that skilled professionals of the 21st century would want/need to collectively bargain seems wacky to me.
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Well, I certainly agree that government sector health plans, starting with teachers and public safety officers, are far more generous than most private sector plans. The City of Brookfield requires a 20% premium share with non-union employees while the other 2/3s of the staff, all unionized, pay 5% to 10%, which is higher than most cities and school districts. The real killer is the high utilization rates - you run to the doctor for every runny nose when it's almost free.
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Hi Scott - The primary point of the article is the innefficiency and higher cost of government provided health plans relative to the plans provided by the private sector. That innefficiency is in the nature of the plans designs and the refusal to reform. Your point of not being able to outsource certain public jobs is an bvious one. But there are thousands that CAN be privatized, or if not privatized, the health care plans can be reformed such that they are not run on forty year old dynamics. What are your thoughts on consumer driven health plans?
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Private sector unions are shrinking because they have outlived their usefulness. They can't guarantee a job if the plant is sent overseas. Their reputation for corrupt leadership doesn't help. They have nothing else to offer for all their union dues.
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debeardda -
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Load more comments View all comments Back to topBlack Swan - Feb 13, 2010 8:47 AM - Report Abuse
RE: "an entity's cost cannot indefinitely remain greater than it's revenue with out significant consequence." This is the heart of any debate on public policy, be it health care, entitlements or for that matter education (some would consider public education the ultimate entitlement).
The American auto industry long ago gave up acting like private enterprise and morphed into pseudo governmental institutions. They actually, as did most of us, believed that what was good for GM was good for America. The big three and the UAW waltzed around the dance floor firmly convinced that America would accept low quality and high prices forever. You are right to point out the 'finite' limits and the 'inevitable consequence(s)'.
We also face finite limits and those inevitable consequences in city government and the school district (whose board elections have been lost in the shadow of the mayorial primary).
Thank you for your thought provoking posts.
Tom G - Feb 12, 2010 2:37 PM - Report Abuse
Scott Berg - Feb 12, 2010 2:29 PM - Report Abuse
Besides providing minor entertainment, this blog, available for all the world to see, is an educational tool. I often have residents ask my why the city doesn't just unilaterally cut insurance, terminate pensions, outsource a service, etc. just like company X did. I was trying to bring out the point for the less informed readers that government entities must abide by different statutes and contracts than private industry, that those rules usually force a more expensive option and that the power to change those rules generally rests with state or federal lawmakers who are often influenced more by unions than by voters. I thought that was your point to begin with.
Black Swan - Feb 12, 2010 2:05 PM - Report Abuse
Tom this is the second time you used the phrase '...the laws of economics are immutable...', in a posting. Question: just whose laws are you talking about, Keynes, Smith, Shiller...?
Tom G - Feb 12, 2010 1:27 PM - Report Abuse
dbeardda - Feb 12, 2010 1:15 PM - Report Abuse
Tom, consumer-driven initiatives address some of the important problems in health care. Specifically, the big one is cost. We pay much more to get less than the rest of the civilized world. But I don't think that the market alone can help address the major issue of preexisting conditions. Would you agree? I think that a marketplace is great as long as it is a fair one. And fairness requires governance.
Scott Berg - Feb 12, 2010 12:57 PM - Report Abuse
Besides, shouldn't we be willing to pay well for people we expect to run into a burning building to save us, teach our children, etc.? It's a real emotional argument and you can't dispatch fire trucks from Beijing.
State and federal laws require union negotiations to rely on comparable pay rates in other cities and City of Brookfield is already on the low end, so there's not much more we can squeeze.
Back when my doctor was two guys in a crummy office there was no need for a CEO's photo on a billboard or non-stop TV commercials or a Director of Patient Satisfaction or a bunch of other non-medicine related sinkholes for healthcare dollars. Every insurance office is lined in marble and has a golf course for a lawn. Where's the efficiency on the provider end?
Tom G - Feb 12, 2010 10:55 AM - Report Abuse
Scott Berg - Feb 12, 2010 10:42 AM - Report Abuse
Public unions are another matter. You can't outsource a local policeman or school teacher job so there is a completely different economic accountability.
Government worker unions understand their boss, the legislators, are elected by them and not by some private system of meritocracy. They are thus motivated to vote for "their guy" who will pass highly favorable job protection laws, generous benefits, etc. Those votes are much more targeted and effective than the broad pro-labor legislation supported by private company unions. Both types bypass world economic pressures.
Unions served a wonderful public good in the first half of the 20th century when government was hands off and corporate greed was allowed to dominate common decency and morality. The real change is that there are now foreign competitors who have no such enforced morality, allowing them to lower their cost of operation by ignoring safety, health care, job security, retirement, environmental preservation, etc., just like America of the 19th century.
The US economy did not explode a century ago due to some inherent cleverness but rather to being the last great world power left standing after both world wars. The playing field has finally been leveled and the nice guys are finishing last. Do we really want to return to what we now consider ruthless business practices? Government size is only a part of the picture. You need the private sector to become competitive.
Tom G - Feb 12, 2010 9:37 AM - Report Abuse
Fair point. While I maintain that government has been a growth industry and private sector in decline in the last few years, it is fair to say that does not presuppose such a dynamic as an indefinite reality. We shall see.