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Volume 11, Issue 32: August 10, 2009

  1. The Modern Health Care Maze
  2. U.S. Banks, Economy Still Face Hurdles
  3. Golden State’s Lawmakers Miss Golden Opportunity
  4. Can North Korea’s Tantrums Be Ignored?
  5. This Week in The Beacon

1) The Modern Health Care Maze

The current crisis in health care in the United States has been fueled by diminishing access, dubious quality, and spiraling costs. Although many critics blame “free-market” medicine for these problems, a long chain of federal legislation has disabled free-market mechanisms. The most crippling incursions have been tax laws that have created a labyrinthine system of employment-based health care, according to Charles Kroncke and Ronald F. White, authors of “The Modern Health Care Maze: Development and Effects of the Four-Party System,” the cover article in the summer issue of The Independent Review.

Comprising patients, health care providers, third-party payers such as private insurers and Medicare, and employers, this four-party system is a relentless juggernaut driven by perverse incentives that push costs higher and higher, Kroncke and White argue. Doctors and hospitals, for example, have incentives to charge what insurers can pay, rather than what patients can afford. Insurers have incentives to deny coverage. Facing ever-rising premiums, employers have incentives to choose increasingly lower-quality insurance products with less coverage or to drop out of the system altogether. Young, healthy employees have incentives to avoid purchasing increasingly unpopular health plans, which puts further upward pressure on premiums.

The only way to reform the health care system successfully, according to Kroncke and White, is to scrap the four-party system and allow a free market to emerge. “Until we reduce government’s ability to surreptitiously distort the market forces that drive the health care industry, the juggernaut and other dysfunctional arrangements will continue to plague the system,” they conclude.

“The Modern Health Care Maze: Development and Effects of the Four-Party System,” by Charles Kroncke and Ronald F. White (The Independent Review, Summer 2009)

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2) U.S. Banks, Economy Still Face Hurdles

Although several U.S. banks recently posted impressive second-quarter earnings, the banking sector still faces tremendous obstacles that will continue to hamper economic growth, according to Alvaro Vargas Llosa, Senior Fellow at the Independent Institute. Banks recorded earnings due not to the recovery of their core business, but to one-time sale of big assets, the collapse of their competitors, the raising of money from issuing debt and securities, and a rise in long-term bonds due to inflation fears.

Further, the banking system has not yet purged its excess of bad loans—especially those whose losses will not be recorded until the loans come due and the borrowers default. McKinsey & Co. estimates that $2 trillion in credit losses will be realized by the end of 2010.

“It is widely believed that government intervention has kept the financial system afloat. But there are signs that it may have actually postponed the recovery,” Vargas Llosa writes in his latest syndicated column. “The aforementioned [McKinsey] report indicates that even in the midst of this crisis the banks have irresponsibly increased their expenses rather than cut their costs, as they should have done if they were serious about getting back into shape. And because the Federal Reserve has maintained low interest rates, they have benefited from the rising difference between the interest they pay on money that they owe and the interest they receive from money owed to them. That won’t last forever.”

“Are the Banks Out of the Woods?” by Alvaro Vargas Llosa (8/5/09) Spanish Translation

Liberty for Latin America: How to Undo Five Hundred Years of State Oppression, by Alvaro Vargas Llosa

Lessons from the Poor: The Triumph of the Entrepreneurial Spirit, edited by Alvaro Vargas Llosa

The Che Guevara Myth and the Future of Liberty, by Alvaro Vargas Llosa


3) Golden State’s Lawmakers Miss Golden Opportunity

Although California’s lawmakers are celebrating their “achievement” of temporarily solving the state’s budget mess, they failed to take advantage of an opportunity to help improve the budget without raising taxes: selling off surplus state property.

One reason for this failure is that state agencies have little incentive to identify and sell off the property because the resulting revenue would flow to the state level, rather than to their particular agencies. As Independent Institute Senior Fellow William F. Shughart II notes, however, this could be corrected by allowing state agencies to keep a predetermined percentage of the proceeds. This would help motivate the agencies to identify and sell surplus property in a timely manner, but the decision to undertake this approach should not be left to their own discretion.

“It’s of course true that property now considered ‘surplus’ is only the tip of the fiscal iceberg,” writes Shughart in the San Francisco Examiner. “If California taxpayers demanded that state government return to its core functions of protecting private-property rights and safeguarding the rule of law, many more state-owned assets would fall under the auctioneer’s hammer.”

“State’s Policy Is to Leave Money Sitting Idle during Deficit Times,” by William F. Shughart II (San Francisco Examiner, 8/6/09)

“A Budget Solution—Sell Off San Quentin,” by William F. Shughart II (San Francisco Chronicle, 3/31/09)

Taxing Choice: The Predatory Politics of Fiscal Discrimination, edited by William F. Shughart II


4) Can North Korea’s Tantrums Be Ignored?

Last week’s dramatic release of Euna Lee and Laura Ling, the two American television journalists held by the government of North Korea, riveted people across the world. Although we can breathe a sigh of relief that the captives were freed, this episode raises serious questions that have not been publicly addressed by the United States government, as Ivan Eland, Senior Fellow and Director of the Independent Institute’s Center on Peace & Liberty, notes in his latest op-ed.

Is the U.S. government (as well as its former leaders, such as Bill Clinton) supposed to be responsible for rescuing Americans if their risky travel plans go awry? Is it wise to reward bad behavior by a cantankerous regime such as North Korea’s? Would it be better to ignore a troublesome government’s temper tantrums, lest giving in to one encourage more bad behavior, as a child psychologist might counsel? Is it too late for the West to offer normalized trade and diplomatic relations with North Korea in exchange for the elimination of its nuclear weapons?

“The United States should probably just accept that North Korea will be a nuclear weapons state and focus on deterring the regime from using such weapons against the U.S.—the threat of incineration by the world’s most powerful nuclear arsenal should suffice—or selling such technology abroad,” Eland writes. “Otherwise, treating Kim [Jong Il] like a child, the U.S. should simply ignore North Korea and its belligerent posturing. Eventually, such behavior will likely attenuate.”

“Treat North Korea As a Child Psychologist Would,” by Ivan Eland (8/10/09)

Partitioning for Peace: An Exit Strategy for Iraq, by Ivan Eland

Recarving Rushmore: Ranking the Presidents on Peace, Prosperity, and Liberty, by Ivan Eland

The Empire Has No Clothes: U.S. Foreign Policy Exposed, by Ivan Eland


5) This Week in The Beacon

Below are links to the past week’s postings to our blog, The Beacon.

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