Tag Archives: health care

My taxes fund healthcare, right? Wrong

Your taxes fund health care, right? Wrong.

My last two posts in this three-part series on health care priorities focused on the ethics of the population valuing disabilities. Essentially, a representative sample of the population decides issues such as whether depression or pain is worse to live with. It doesn’t matter if this sample contains people who have experienced the disabilities or not or whether they are knowledgeable or not.

There are several reasons put forward by health economists to justify this, but the core one is that the population funds health care (via taxation) and it’s their values that matter. I drew attention to the emerging evidence that whilst this may be an admirable democratic aim, its outcomes may be dreadfully flawed since many people have no idea what various disabilities are like to live with.

A senior health economist who was instrumental in introducing this approach to health care commented to me on twitter at the weekend. He said that taking population values was no different to allowing UKIP votes. For those unfamiliar with British politics, UKIP is an extreme right-wing party full of homophobes and racists that advocates British withdrawal from the EU. His implication is that democracy is paramount, even when it means including the views of a bunch of insane idiots. However, he has used a straw man argument.

(1) I never said we should definitely throw out population values, merely that they should be debated. How many people in the population outside the health economics community are even aware that this is how priorities are set?
(2) The link between the tax-paying voting public and health funding is spurious, as I am about to explain.

So, in this final post, I will take issue with this core assumption – that our taxes fund health care. It might get a bit “wonkish” and less approachable than my last two postings, but I shall do my best to explain it – I myself have spent a long time getting my head around this and appreciate comments and criticisms. The answers to such criticisms will no doubt be available on the blogs of the experts in the field, and criticism will encourage me to seek them out and plug the holes in my own understanding (and on this posting).

First, let me make one thing quite clear. What I am about to discuss is relevant only to countries that issue their own currency, for example Sweden and the UK. All the countries in the Euro area do NOT issue their own currency, they essentially use a “foreign” currency issued by the European Central Bank. They have become currency users, not currency issuers. It is not too wide of the mark to say those countries do have a national credit card and must balance their books (subject to growth). Sweden and the UK do not.

A second thing to make clear concerns hyperinflation, a boogeyman that raises its head whenever this topic is discussed in the media or well-known blogs.

Historically, hyperinflation has NOT generally been caused by “governments simply deciding to spend willy nilly” and “just turning on the printing presses”. Major hyperinflations – think Weimar Germany, Zimbabwe – have been caused by either huge and unpayable debts denominated in foreign currencies or a huge collapse in productive capacity. Governments in such circumstances have actually played catchup in terms of inflation, their currency issuing behaviour has been largely an effect and not a cause of hyperinflation.

OK, now, I hope, I can proceed without cries of “we will become the next Greece” or “we will become the next Zimbabwe”.

To understand how (public) health care is really funded, it is necessary to understand how government gets the money for all the services it provides or funds. To get you thinking about this I would like you to consider a not-very-noble episode in the history of the country I am from originally, the UK: the period in question is the conquest of various parts of Africa.

The British colonial occupiers faced populations who certainly had “economies” but these economies did not use British Pounds (and in many cases didn’t use money at all). The British wanted these native Africans to buy British goods, and be integrated into the wider Imperial economy. The problem was the Africans had no British pounds and didn’t produce goods that Imperial markets wanted (which didn’t bother the African people in the least).

How could the colonial Brits tax the Africans in order to provide the infrastructure that would allow Africa to produce for imperial markets?

Answer: they couldn’t.

How could the colonial Brits force the Africans to use British pounds so they could buy things from the rest of the empire?
Answer: they couldn’t
(at least, not without shooting a lot of them, which decreased both the productive capacity and the market, not to mention being genocidal).

The British authorities had to (1) inject money (British Pounds, or something directly convertible into them) into the local economies and (2) force people to use it. How did they do it?

To achieve the first aim they employed locals to build railways, mine ores, etc and paid them in pounds or a convertible currency – one accepted elsewhere in the world for trade. Where did that money come from? There was no “pot of previously collected taxes”. They just created it. Then, to achieve the second aim they imposed taxes (primarily on people, a type of poll tax) payable in pounds. So government spending came first, and taxation came later. In fact government spending was essential to provide the public with the currency needed to fulfil their obligations to the state in taxes.

So in fact, taxes don’t “fund” public services, public services provide income to people that, after being spent through the economy, allow people to pay their taxes.

When governments provide funding for health care, or other public services, they don’t dip into some pot of money, they just press keys on a computer to create money that is used to pay doctors or whatever. This money is simply magicked up and the fiction of there being some limited amount was laid bare when central banks created billions of dollars to bail out banks in 2008/2009.

In 2009 this rocked the foundations of mainstream economics and to maintain its dominance, enormous emphasis was put on the notion of “paying the money back one day”. Indeed governments usually issue bonds to match their net spending (spending total minus tax receipts. This helps preserve the idea that overspending will have to be paid back one day. But what exactly happens when someone buys a bond from the government or its central bank? The individual gives over money and gets the bond, but what does the central bank do with the money? It destroys it. Physically, if it is a wad of cash, electronically if it is a bank direct payment.

After all, what is the sense of maintaining a stock of money, when you can create money at will? The analogy given by some researchers is the runs accumulated in cricket. There is no “finite stock of runs” that can be distributed – the score can be as low or as high as the cricketers make it.

The link between bonds and government spending is a fiction and was demonstrated to be so in another country I have citizenship of – Australia. In the late 1990s/early 2000s the right-wing government of John Howard began to run budget surpluses. Repeatedly. So it stopped issuing bonds – bonds are IOUs for budget deficits, right? What happened? The financial sector was furious. They lost their main tool for pricing all other risky assets and a primary vehicle used for the process of saving. The government then started issuing bonds again, despite running budget surpluses. If a government really insists on matching its net spending with bond issuance then fine, but let’s not deceive ourselves as to what it is really doing – providing corporate welfare in the form of guaranteed income to savers who are unwilling or unable to inject their savings into productive investments. And there is no limit to how many bonds the government can issue – it can always create more money to pay the interest on them! After all, Japan has been doing this for over 20 years with no inflationary problems. As has been said of the hawks: “they have predicted 20 of the last zero hyperinflations in Japan”.
Anyone who talks about, or repeats, the story of the “nation’s credit card being maxxed out” should immediately be ignored. When they say “if I ran my finances like the government ran theirs I’d be flat broke in no time”, you have the perfect answer: Of course you would! You can’t issue money with a printing press (or these days, pressing F5 repeatedly on a computer) – unless you want to goto jail of course, whilst the government can create money at will!

Now of course just because a government can do this doesn’t mean they should. Clearly there is a limit to how much money should be created – but this limit has nothing to do with any mythical total pot of money, debt ceiling or whatever. It is the inflationary ceiling: if the government injects money beyond the point where everyone who wants a job has a job, then it will bid up prices. So that is a no-brainer. But western economies have not been at full employment since the 1970s. Taxation primarily services two purposes: (1) To provide a “safety valve” to prevent overheating in the economy, and (2) To achieve certain distributional aims (including sin taxes like those on booze and tobacco). The link between taxes and major public services is nebulous at best and totally non-existent at worst – which is why hypothecation is also stupid. Yes, the public arguably has a role in deciding what system is used to value and distribute health care, in the same way that general policies regarding other public services are typically part of political party manifestoes. However, the idea that people have an undisputed right to value impaired health states, due to their status as tax-payers (whether actual or potential) is a nonsense.

These ideas have been developed by Warren Mosler, William Mitchell and others. They form what has come to be known as Modern Monetary Theory (MMT). MMT tries to steer clear of political biases: it describes how the economy works and how money is created. Strictly speaking, you can agree with it and hold either right-wing or left-wing views. MMT can be used to support Reaganite “the deficit doesn’t matter” views or left wing large public sectors. Indeed one of its biggest proponents is a hedge fund manager who made enormous amounts of money by recognising the key tenets of MMT.

For those who remain unconvinced, and who believe modern monetary theory is just another fringe, crackpot theory, I offer a final defence, from someone so mainstream he wrote what was the definitive textbook in economics for around 40 years.

“I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires….”

So, Samuelson admits that there is no budgetary limit on public spending in countries that control their currencies. The fiction that is there (in the form of a religious doctrine) is necessary in order that us “irresponsible citizens” will not vote for parties that advocate huge spending increases. Democracy, in other words, is not to be trusted. Nice to know macroeconomists are so willing to lie, and so dismissive of the public, eh?

Returning to the original premise, what does this mean for health care in countries like Sweden and the UK? Well, it means that to the extent that real (not financial) resources – people, drugs, etc – are available, the government could expand funding tomorrow with no inflationary implications and with enormous health and employment benefits. Clearly, new doctors cannot be produced tomorrow, it takes years of training, but putting unemployed and underemployed to work in caring duties would take enormous strain off health and social services in the meantime.

And what about economic evaluation, the field I began work in almost 20 years ago? Indeed even though I no longer work in “traditional” economic evaluation, my work in choice modelling still implicitly or explicitly assumes there are difficult choices to be made. Am I being a hypocrite? Perhaps. Although I justify my work with the thought that I can’t change the system by myself and even in an “ideal” economy where everyone was employed, there would still be difficult choices to be made at the margin, given the enormous resource implications of some aspects of medicine. So my work aims to do what we should all be doing – minimising distress and directing resources to where they are most needed in society.

MMT merely means we have set the bar incorrectly – but there are people out there who are far more qualified than I to fight that fight. However, I shall keep reading and learning. I used to wonder why I never “got” macroeconomics at Cambridge. I got firsts sometimes in other subjects, but never, ever, macro. There was something that just didn’t click with me. Now I know it wasn’t my fault, the subject matter was, well, a steaming pile of crap. To be fair on the Cambridge lecturers, one of them, the late Wynne Godley (who lectured me before he had his epiphany) later went on to “see the light” and reject the establishment view. He also predicted the current Euroland crisis many many years before it happened. I now work in a field that is largely judged by predictive ability. MMT has passed that test – repeatedly – and with flying colours, and not for the “a stopped clock is correct twice a day” reason: it has given circumstances and explanations for when the economy would fall over. So I would say the onus is on mainstream economics to do some explaining.

Werner Brouwer made a point on Twitter that if you move to patient valuation you run into the problem of adaptation effects. For instance paraplegics tend to rate their health as barely worse than healthy people (because most of the time they simply don’t think about their paraplegia). Given the traditional valuation methods used by health economists, this is a good point. However, I and colleagues showed how to quantify these effects when you use two different type of choice experiment data. In fact, if I can get another PhD student, I have an excellent dataset where we deliberately sampled people in low quality of life states to see what they valued. A quick and dirty analysis showed that people adapt differentially to different dimensions of quality of life.