What happens when countries pile up debt?

Business Insider interviews Ken Rogoff:  Growth slows way down; and the yuan replaces the dollar.

• When countries hit gross government debt as 90-100% of GDP, problems are bound to arise.
• If countries go too long with stimulus it can leave them in a debt trap and with prolonged slow growth.
• The U.S. has been in 'default' before -- when it went off the gold standard -- and there is no reason why it won't have problems again.
• Banking crises inevitably lead to sovereign debt crises as government

We can learn a lot from our mistakes, ....

But only if we let states make them.  Some of our most valuable experiments ended in failure:

Expanding public programs. In 1994, Tennessee started a massive Medicaid expansion (eventually covering 500,000 additional residents). A decade later, the state abandoned the experiment after costs more than tripled: from $2.5 billion in 1995 to $8 billion in 2004, consuming one-third of the state budget. When the experiment unraveled in 2005, 170,000 enrollees were dropped.

Imposing heavy-handed insurance regulations. Starting in April 1993, New York State imposed two new regulations, intended to make insurance more affordable for older and sicker residents. Instead, community rating (which forces insurers to charge one price regardless of age or health status) and guaranteed issue (which forces them to offer policies to all applicants) nearly obliterated the market for individual insurance. The regulations drove up prices for young and healthy applicants, pushing them out. Today New York’s individual insurance market is 4% of its size in 1994.

Creating a new “public option.” In 2003, Maine launched an ambitious plan to cover all its uninsured, in part by creating a government-run, “public option” insurance plan with taxpayer-subsidized premiums. An expensive train wreck, less than 10,000 residents have enrolled since it started in 2005 – at a cost of $155 million. Today, enrollment is capped, due to budget constraints.

Barbies, Printer Cartridges, and Razor Blades

In the last example of indirect price discrimination, P&G has announced the release of its next generation Gillette Fusion razor. The suggested price for a handle and single shaving head will be $10.99. A 4-pack of replacement blades? $16.99.

All you need to know about the health care summit

liveblogging from CATO

There are two ways to approach reducing the use of high-cost, low-benefit procedures. You can have the government tell people what they can and cannot have. Or you can have individuals pay for a larger fraction of the medical procedures that they consume. It really comes down to those choices.

Advocating either one of those is political suicide, and talking about anything else is a waste of time. The Democrats will not advocate government rationing, and the Republicans will not advocate scrapping most of our current system of third-party payment in medicine. Instead, the summit, like the entire "health reform debate" this year, will be a waste of time.

More bad news...

from the IMF:

The IMF forecast in November that gross U.S. borrowings will amount to the equivalent of 99.5 percent of annual economic output in 2011. The U.K.’s will reach 94.1 percent and Japan’s will spiral to 204.3 percent.

Investors will eventually demand higher interest rates to lend to countries around the world that have accumulated debt, including the U.S.

"No one washes a rental car"

Clear thinkers like George Will are hard to find.  In this ten minute clip he takes on President Obama's "dependency agenda."

What will the end game look like?

Ferguson claims that it will take a simple, but dramatic event to shake the belief in the American Empire.

Foreign Affairs: But one day, a seemingly random piece of bad news---perhaps a negative report by a rating agency---will make the headlines during an otherwise quiet news cycle. Suddenly, it will be not just a few policy wonks who worry about the sustainability of U.S. fiscal policy but also the public at large, not to mention investors abroad. It is this shift that is crucial: a complex adaptive system is in big trouble when its component parts lose faith in its viability.

HT:  Business Insider

Doomsday cycle

Bailouts create incentives for others to take excessive risk (moral hazard).  Then when the economy slows, even more people require bailouts. We have to recognize--and then stop--this cycle.

The real danger is that as this cycle continues, the scale of the problem is getting bigger. If each cycle requires greater and greater public intervention, we will surely eventually collapse.

HT:  Merle Hazard

How does Germany control health care spending?

By contracting with office-based doctors (gate keepers?) , by using DRGs [diagnosis-related groups] to reimburse for hospital care, and by encouraging everyone to avoid unnecessary expenditures.

As an example, I will describe the incentives we use to limit drug expenditures. First, we introduced small copayments for prescriptions. These copayments, which vary based on each drug’s cost, discourage patients from using expensive medications that provide no real advantage over less expensive alternatives.

We then introduced a reference price system based on therapeutic classes—groups of similar drugs used for the same condition. Under this system, we reimburse for all drugs in a therapeutic class at the same price (for more details on how this is done, see sidebar “How Germany establishes reference prices,”). Our goal was to give pharmaceutical companies an incentive to concentrate on innovation and not simply to produce follow-on medications. Reference pricing does not prevent a pharmaceutical company from demanding more money for a given drug, nor does it prevent a doctor from prescribing that drug. However, the doctor would have to explain to patients why that drug is necessary, and the patients would have to be willing to pay an added amount above the normal copayment. The pharmacists filling the prescriptions would also question the patients to make sure that they understood that less expensive alternatives were available. Because generic substitution is permitted in Germany, we have yet another check in place to ensure that expensive drugs are used only when appropriate. Last but not least, we removed most over-the-counter drugs from the benefits package. Patients who buy drugs without a prescription have to pay for them.

Stossel & forced unionization of day care providers

"The Oracle" speaks