Monthly Archives: December 2011

Why Wouldn’t We Export Natural Gas?

The Wall Street Journal recently published an article that demonstrates how disputes about individual interests often impede us from doing what is best for the country.

According to the article, manufacturers are pressing the government to restrict potential exports of natural gas in order to keep prices low in the United States.  This is a blatant attempt to put their interests ahead of the nation’s.  The arguments make no sense from an economic point of view and would damage the economy.  This matters because exports will require the construction of large facilities to make liquefied natural gas.  If the administration uses these arguments to deny the permits needed to construct the facilities, there will be fewer exports.  Manufacturers may benefit from lower prices but these gains will be offset by losses to producers and to the customers of manufacturers.  Economic theory tells us that the nation will be worse off as a whole.

You might think that in the face of large persistent trade deficits, any exports — especially energy exports — would be welcome.  And with unemployment remaining stubbornly high the opportunity to construct billions of dollars of new infrastructure would be an important source of new construction jobs.  But apparently these gains might be thrown away to create a hidden subsidy for manufacturers.

The argument from manufacturers is that exports would raise the price of natural gas in the United States.  This would make domestic industries that use gas either as fuel or an industrial input less competitive internationally than they would otherwise be.  This is true, but it applies equally to all exports, not just natural gas.  To some extent exports of  any product reduce domestic supply and therefore raise the cost to domestic users, whether they are other companies or final consumers.  Does this harm the economy?  No, because the losses to consumer are offset by the gains to exporters and consumers.  Moreover, there is a general national interest in promoting economic efficiency.  Over the long run, the country is better off if all industries are forced to compete on a level playing field against international competitors.  Subsidizing companies by keeping their inputs artificially cheap quickly leads to dependency.  International competition benefits customers, whether they are consumers or other companies.

The United States has a strong interest in maintaining a reputation as a reliable exporter.  We strongly object when other countries restrict the export of raw materials in order to try to gain a competitive advantage.  A good example is China’s recent efforts to limit exports of rare earth metals.  We especially object in the case of energy exports.  Because the United States is a large exporter of other basic commodities such as grain, it has a strong interest in building a reputation as a reliable supplier even or especially when prices are high.  If foreign countries are not assured that we will allow their customers to compete against domestic customers  they will try to protect themselves by buying from other countries or subsidizing domestic producers.  This is one of the arguments Japan makes to justify its subsidies to Japanese rice producers and barriers to imports of American rice.

The manufacturers argue that raw materials are different.  For instance, a Dow Chemical spokeswoman is quoted as saying: “When natural gas is used as a chemical raw material, it creates eight times the value compared to other uses, and fuels higher-paying jobs, exports of finished goods and the vitaliaty of the manufacturing sector.”  It is easy to see why Dow, which uses natural gas as input to many of its products, would like to see its cost of business kept low.  But then why don’t we limit wheat and corn exports so that food processors can become more competitive?  For that matter, since a lot of Dow’s products serve as inputs for other manufacturers, why should we let Dow export or raise the price it charges to its customers?  Doing so only makes these customers less competitive.

The cynicism in these arguments can be seen  by reflecting on the fact that a short time ago people expected the United States would have to import gas rather than export it.  If the nations supplying us with gas had restricted those exports in order to help their companies, or if the government had denied the permits to build the necessary infrastructure, you can bet Dow would have objected.

The problem with economic progress in a modern economy is that it almost always hurts an existing interest.  If that interest is allowed to stop advancements, wages and living standards will be much lower and all American businesses will gradually become less competitive.  The Administration should see these arguments for what they are: a cynical attempt to put narrow interests ahead of the national welfare.

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December 16, 2011 · 12:33 PM

Dr. Berwick’s recent interview sheds light on the problems with Medicare

The New York Times recently ran a story based on an interview with Dr. Donald M. Berwick who stepped down last week as Administrator for the Centers on Medicare and Medicaid Services.  He had received a recess appointment to that position after his nomination ran into trouble over statements concerning rationing health care.

Perhaps without realizing it, Dr. Berwick makes several statements that highlight the difference in philosophy between the Administration and Republicans over health care.  The first statement is Dr. Berwick’s conclusion that 20 to 30 percent of health spending is “waste” in that it yields no specific benefit to patients.  This is a stunning admission from the head of agency charged with supervising these programs in a Democratic administration.  Dr. Berwick lists five reasons for this waste: 1) overtreatment of patients; 2) failure to coordinate care; 3) administrative complexity of the health care system; 4) burdensome rules; and 5) fraud.  Of these at least two are directly tied to government action and the other three are strongly influenced by it.  All of them are long-standing issues.  That they continue to cause so much waste despite (or perhaps because of) over 40 years of experience might lead one to question the role of government in health care.

The second statement is Dr. Berwick’s response to why Americans are still deeply divided over the new health care law: “It’s a complex, complicated law.  To explain it takes a while.  To understand it takes an investment that I’m not sure the man or woman in the street wants to make or ought to make.”  Given the waste already in the system, Americans might naturally distrust a complex law that they do not understand, especially when complexity is already creating waste.  Yet Dr. Berwick thinks they should support the reforms because of their ultimate destination: “We are a nation headed for justice, for fairness and justice in access to care….We are a nation headed for much more healing and much safer care.  There is a moon shot here.  But somehow we have not put together that story in a way that’s compelling.”

Third are Dr. Berwick’s observations on government in general: “Government is more complex than I had realized….Government decisions result from the interactions of many internal stakeholders — different agencies and parts of government that, in many cases, have their own world views.”  He also contrasts his experience in the private sector: “I was used to moving very, very fast.  We could decide on Monday to start a program and have it in existence on Wednesday” with that in government: “I wish they could go faster…[but]…I don’t think you want government to be impulsive.”

One seldom sees such clear examples of the disconnect between the defenders of recent health care reforms and their opponents.  Note the implicit assumption that the law deserves support merely because of its goal, regardless of whether it is likely to succeed in that goal.  Yet this is precisely where the disagreement lies.  There is broad agreement about the goal of increasing access and quality of care.  There is strong disagreement about whether the Administration’s policies will move us toward or away from that goal.  Democrats tend to think that guaranteeing everyone health care and then delivering it through a centralized program in which the young and healthy subsidize the old and sick is the only solution.  Republicans believe that, just as in other markets such as telecommunications and transportation,  increasing competition and innovation will make health care more affordable by driving down prices.  The two approaches have dramatically different implications for the role of government and support for last year’s reforms.  Americans who oppose the law see the waste that Dr. Berwick’s points to as evidence for their view.

The two approaches have important implications for the affordability of health care.  The news article points out that: “For political reasons, the administration did not want [Dr. Berwick] to defend past statements in which he had extolled the virtues of the British health care system and had suggested a need to cap total health spending and limit the supply of costly high-technology medical care in the United States.”  One was a 2009 statement that: “The decision is not whether or not we will ration care — the decision is whether we will ration with our eyes open.”  Dr. Berwick feels that Republicans are unfair to depict him as an advocate of rationing health care and he defends the statement: “My point is that someone, like your health insurance company, is going to limit what you can get.  That’s the way it’s set up.  The government, unlike many private health insurance plans, is working in the daylight.  That’s a strength.”

Yet almost everything Dr. Berwick has said up to this point belies this last statement.  His 2009 statement was correct, which is precisely why the Administration did not want him to try and defend it.  Rationing is inevitable in a world of scarcity.  The Administration prefers government rationing through careful studies about the costs and benefits of alternative treatments and improvements in the incentives that government policy gives to patients and providers.  Yet its own official has just listed a number of reasons why this approach is unlikely to succeed: 1) it wastes a large amount of the money passing through its programs; 2) decisionmakers are too self-interested to act consistently in the public’s interest; 3) it moves too slow; 4) it is too complex.  Given all of this, how probable is it that better government policy can deliver the improvements needed to make health care more affordable?  Not very.  Even under health care reform, government programs will suffer a debilitating handicap: their decisions will be political.  And because they are political a wide variety of interests other than those of the patient or the general public will often move to the forefront.  Every penny of the 20-30 percent of waste that Dr. Berwick pointed out is income to one provider or another.  They will fight hard to keep it and past experience gives every indication that they will succeed regardless of what the last Congress intended.

There is another way.  Markets also ration care in a much different way; through prices.  Provided you pay the price, you can have as much as you want.  Prices for a product usually start out high, but this attracts other suppliers who, through competition gradually bring prices down.  New entrants continually introduce new products and technology into the market.  Assuming they have enough purchasing power (a key concern that vouchers and other supplemental payments are designed to address) patients decide for themselves how much care to buy.  There is evidence that patients are increasingly able to make intelligent decisions about their care; forming support groups, exchanging health information, and even organizing their own medical trials.  Sensible government programs could help this process.

One could have hoped that Dr. Berwick’s experience with government would have made him more sympathetic to an alternative path.

 

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