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A Case of Market Failure

The Folly of ObamaCare

by ANDREW LEVINE

Will the Obama administration bungle Obamacare?   They are showing every sign of it; they can’t even get their websites to work properly.  This level of incompetence is mind-boggling.   After all, competence was supposed to be Obama’s strong suit.

Back when it dawned on Obama’s supporters that they were “disappointed” with the way that his presidency was going, the fallback position was that at least he’s better than Bush.  Then, when even that no longer seemed obvious, the word was that, unlike the Bush-Cheney crowd, at least he and his coterie are competent.

The evidence for that came mainly from the 2008 campaign; competence has been in short supply ever since.  Still the Obamacare rollout breaks new ground.  Even the Clinton and Kerry State Departments can’t compete.

Could faint praise for Obama’s competence now be on the way out too?  Maybe.  With more than four years to prepare for the implementation of what the media calls Obama’s “signature” legislation, the glitches encountered in October and continuing to this day raise serious questions.

Odds are, though, that the problem will pass; that Obama’s people will eventually get it right – enough at least to muddle through this stage.  How hard can it be for them to do what the hucksters at amazon.com have been doing for years?

Meanwhile, having tried and failed to convince anyone who is not a card-carrying Tea Party looney tune that Obamacare would wreck the economy — along with the moral fabric of society and perhaps civilization itself — Republicans are now pressing a less alarmist line.

Some of them now even concede that the technical problems will probably be fixed.  Their latest contention is that after that happens, more disabling problems with emerge.

As David Brooks put it, Obama will get past the foothills, but founder on the mountain peaks.

He and the others are vague about why they think that will happen, but the gist seems to be that too few young and healthy people will sign up to make the promise of affordable health insurance feasible.

That may be more of a wish than a well-reasoned prediction.  But they do have a point: unless lots of people who are unlikely to need health care in the near future sign on, the risk pool won’t be large enough to drive prices down.

The problem with the glitches, then, is not that they won’t be fixed in time, though that is a possibility.  It is that the frustrations they have caused and will continue to cause in the days and weeks ahead may dissuade individuals in an easily dissuadable target market from trying and trying again.

That could happen. Odds are, though, that the problems with the rollout will not throw the process too far off track.  The damage can probably be contained.

If so, Obamacare will “succeed” just as its precursor, Romneycare, did.  That Republican program did fix some problems with insurance markets and it did diminish the number of people in Massachusetts who are uninsured.  This is all that Obamacare will do for the rest of the country if it doesn’t founder first.

From the moment his ambitions led him to champion Tea Party causes, Romneycare’s success was an embarrassment for Mitt Romney.  Insofar as he could not deflect away awareness that he and his fellow Republicans were campaigning against their own program, his line has been that what was workable in Massachusetts cannot be applied everywhere else.

It is possible, of course, that Romney was right; as the saying goes, even stopped clocks are right twice a day.  Maybe Republicans who think that Obama won’t get past the foothills are right too.

Republicans in Congress have been working overtime to assure that this will be the case.  Republican governors in states with Republican legislatures have been hard at it too.

They have fashioned a twofer for themselves.  Like their colleagues in Washington, they badmouth Obamacare — for all the wrong reasons.  And by refusing federal aid for expanding Medicaid, they harm poor people too.  Can anyone observe them in office and not conclude that waging war on the poor is their real passion?

All the shenanigans emanating out of Republican quarters have surely done Obamacare’s prospects harm.  But if his signature legislation fails – not right away, but over time — it won’t be because of anything the Republicans have done.  It will be because the program itself is flawed.

Building a large enough risk pool is not the only problem that lies ahead.  Indeed, the unlikely – but not insignificant – possibility that they won’t get enough people to sign on is symptomatic of a deeper problem that will remain even if Obamacare does succeed on its own terms.

The deeper problem is that Obamacare relies on market mechanisms and private ownership of health care resources.

In our political and media culture, it is blasphemy to speak ill of markets and private ownership.  But they are the problem, and there is no evading this stubborn fact.

In free market theology, supply and demand are in concord; wherever there is a demand (a want that someone is willing to pay to have realized), someone will come along to satisfy it.

But even the most ardent free marketeers understand that this is an idealization that real world markets seldom even approximate.  There are too many coordination problems, information deficits, transaction costs, and so on.

Also, the theology assumes that want satisfaction is in and of itself a good thing.  Perhaps it would be if people were the authors of their wants.  In the real world, this is seldom the case.

Actual wants are conditioned in countless ways by the availability of goods and services and by the circumstances in which individuals find themselves.  In addition, demand is shaped substantially by outside factors; this is what marketing and indeed the entire advertising industry are about.

On the face of it, satisfying demands through voluntary market transactions would seem to enhance the wellbeing of all the parties to the exchange, since they would only participate in the exchange to make themselves better off.

But even leaving aside the consequences of their transactions for those who are not parties to them, the fact that wants are conditioned in the ways that they are would seem to undo the idea that there is always a good case for satisfying them.

The dominant view nevertheless is that, not just in theory but in practice too, nothing works as well as markets for enhancing overall wellbeing by getting wants satisfied, and that this is an unequivocally good thing.

Those who hold this view also tend to believe that the more unregulated or otherwise unconstrained markets are – as they would say, the “freer” they are — the better.

These views are eminently contestable, but there is no need to take on such large and complex issues to see where Obamacare’s purportedly beneficent insurance markets go wrong.

* * *

Insurance markets exist because people want to hedge against risk.  But in order to satisfy the demand, there must be people willing to sell insurance to those who want it; and the sellers must have a reasonable expectation of profit.

They will profit whenever they take in more from premiums than they pay out in claims.  In principle, this will happen if they price the insurance they sell correctly.

They therefore need reliable estimates of the probabilities of various outcomes.  This is what actuaries do; they have been doing it for centuries and they are very good at it.  They also need to insure a lot of people.

If they could insure an infinite number, the outcomes would accord with the probabilities; they would then be as sure of coming out on top as if they printed the money themselves.

This is impossible, of course; but they can approximate that result with a reasonably large risk pool.   And then they can further hedge against risk by taking advantage of secondary insurance markets and the arcane contrivances of hedge fund wizards and other financial schemers.

It is the same with casino operators.  They know the probabilities and they have ample numbers of customers.  Therefore, while individual gamblers may win or lose, the house always wins in the long run.  Unless they are ineptly run or monumentally unlucky, insurance companies always win too.

Whoever buys insurance therefore takes on a bet that he or she is more likely to lose than to win.  Why would anyone do that?

The answer is that very bad things do sometimes happen, and it can be, and usually is, reasonable to protect oneself from their financial consequences should they occur.   If the way to do that is to make a bet with an insurance company that you are not only likely to lose but lucky when you do, then so be it.

Consider fire insurance.  Whoever buys it is likely to come out with a net loss.  But homeowners who want to hedge against the very dire prospect of winning the bet because their houses burn down will nevertheless be eager to take that bet on.

It is relevant too that most homeowners hold mortgages, and that mortgage holders insist that mortgagees buy insurance.  Therefore even risk-prone homeowners who might be tempted to do the rational thing by staying out of the market will buy the insurance nevertheless – because they have no choice.

Then the risk pool will be enlarged to include almost every homeowner, and premiums will become cheaper accordingly.  It is a virtuous spiral.

Health insurance is more complicated because buyers are not just insuring against catastrophic contingencies and because while very few people own houses that burn down, almost everyone is likely at some point, usually at many times during their lives, to make use of health care providers.

Moreover, the cost of health care is basically arbitrary and therefore more malleable than the cost of the building materials and labor necessary for rebuilding houses.

Ironically, one of the factors affecting health care costs – usually driving it up – is insurance itself.  Providers will charge what the market will bear, and a market in which insurance picks up the bill will usually bear quite a lot.

The fact that providers must deal with insurance companies drives up costs too.  It creates administrative work that is time consuming and costly and that adds nothing to the provision of health care itself.

A way to make these consequences less onerous would be for the government to negotiate costs with providers.  Large firms do this all the time.  But the big insurance companies, the for profit health care providers, Big Pharma, and other assorted profiteers make sure that the government does not.

Thanks to their machinations, Congress won’t even let Medicare negotiate prices with drug companies.  With its enormous bargaining power, it could get prices lowered considerably; this is what the governments of other countries do.  But not our government.  The result is that Americans pay more than people elsewhere  for pharmaceuticals, and indeed for almost everything else having to do with health and health care.

One would think that the free marketeers would object.  However, few of them do.  Their faith in markets may be sincere but, for most of them, capitalists’ interests come first.

Therefore, if health care is to become more affordable for some or all people, the risk pool has to be enlarged; there are no other strings to pull.

However expanding the risk pool will not affect the cost of health care itself; at most, it will affect the cost of health care insurance.

Obamacare is therefore not really about health care reform; it is about health insurance reform.  As such, it has decent provisions.  Among other things, it puts a break on the insurance industry’s penchant for selling junk insurance and it makes it illegal for insurers not to sell insurance to people with “pre-existing conditions.”

But will it really lower insurance costs?  The answer is yes, if enough healthy people come into the system.  That is hardly a sure thing, though — even with the subsidies Obamacare offers to lower income people and the fines it levies on those who don’t sign on.

The reason, again, is that, like all insurance, health insurance is a bad bet and, for people who are short on cash and savings, as many young and healthy people are, buying it will often seem like  — and be – an extravagance.

The program will therefore work only if its designers get the carrots and sticks right.

Bipartisan support for free market theology doesn’t help.  It encourages skepticism, if not outright hostility, towards the visible hand of the state; and idolatrous worship of the more debilitating invisible hand of the market.

Nevertheless, Obamacare can probably be made to do what Obama et. al. intend.  It won’t be easy, though; and without competent administrators, it won’t be possible at all.

It would be better, of course, had Obama not jettisoned the so-called public option.   No doubt, it would have come with meager provisions, compared to private insurance plans, because a truly attractive rival would sweep all private options away

Since he and the people around him are eager to keep the money flowing into the plutocrats’ pockets, Obama would never allow that.

Even so, a public option would have some effect in holding down the prices insurance companies charge.  Better yet, its very existence would challenge their stranglehold over the entire health care system.

But thanks to the machinations of the Commander-in-Chief and his trusty aide-de-camp, Rahm Emanuel, we will never know.  Chicago’s loss is the country’s gain, but Hizzoner Emanuel’s legacy lives on.

* * *

If there were anything like a “free” market in health insurance, premiums would be tailored to the circumstances of individual buyers.

This would make health insurance unaffordable to those who need it most, while those who are unlikely to need it would still have to be properly incentivized.  In these circumstances, were health insurance sold at all, it would only be to a small niche market.

This is why health insurance companies have never been permitted to make discriminations based on a host of factors that are actuarily relevant.  In this respect, the Affordable Care Act builds on past practices.

In doing so, it further distances the kind of health insurance market it envisions from the free market theologian’s ideal.  It could hardly be otherwise: markets and health care make for an uncomfortable fit.

Even so, it should be possible to jigger things around well enough to make the system work.  In principle, all that is required is the right mix of subsidies (carrots) and fines (sticks).

Maybe the Affordable Care Act already has those in place.  Maybe the people who designed the program are more competent than the ones who rolled it out.  Time will tell.

If Obamacare succeeds in getting more people insured than now are, it will be a good thing – maybe even good enough to outweigh the ways it further entrenches the power of private insurance companies, Big Pharma and various other health care profiteers.  Time will tell on that as well.

And since there is nothing better in the offing – not with Clinton-Obama Democrats and whacked out Republican-Tea Partiers calling the shots – it is better that the system works than that it does not.

If problems of the kind presaged by the program’s rollout persist, it is doubtful that, in the short run, anything good will come of it.  If Obamacare fails now, it will almost certainly not boost the prospects for wiser alternatives; it will only prolong the status quo.

The irony is that there plainly are wiser alternatives.  The whole world knows what they are.  Before his ambitions got the better of him, even Obama knew.  Maybe in his more lucid or less corrupted moments, he still does.

But, on his orders and with the full cooperation of “moderate” Democrats like Max Baucus, Chairman of the Senate Finance Committee in 2009, single payer or Medicare for all programs were off the table from the beginning.

From even before Day One, it was clear that health care would not become a right; it would remain a commodity that individuals or their insurance companies buy.

Criminal defendants have a right to an attorney; and, as everyone who watches television knows, if they cannot afford one, the state will provide one for them.

It is far from a perfect system; well off defendants with private lawyers usually get better legal representation than defendants who rely on the state.  But there is a floor, and the presumption is that even minimal legal representation is good enough for the right to be more than a sham.

The state provides legal assistance because potential defendants cannot be expected to buy legal insurance — not even if anyone would, or could, sell it to them.  If there is to be a right to an attorney in criminal cases, state provision is the only way.

With health care there are other ways.  Highly regulated, heavily subsidized insurance markets comprised of not-for-profit firms might even be among them.  But any resemblance between that kind of arrangement and Obamacare is strictly coincidental.

Obamacare is not about implementing a universal right to health care.  To its credit, it does aim to insure more people than would be insured in its absence.   It does so, however, with at least as much regard for the interests that feed off accidents, diseases, and chronic ill health as for those who suffer on these accounts.

Is enriching those “stakeholders” its main point?  Or, as Obama apologists insist, was Obamacare fashioned that way in order to buy off the opposition?  The answer is: probably, a little of both.

However that may be, because it is profiteer-friendly by design, Obamacare will not, and cannot, finally put the provision of health care in the United States on as humane and rational a course as it is everywhere else.

And it will do nothing to counter the rise of health care costs.  This is why, in the long run, even if everything goes as well as it can, it may not even lower the cost of health insurance.

It could turn out, in other words, that the Affordable Care Act will ultimately make nothing more affordable.   Whatever his intent, Obama’s use of that word may someday be seen as a cruel joke.

*                                  *

By the early sixteenth century, the idea associated with the Greco-Roman astronomer Ptolemy, according to which the earth is the center of the universe around which the sun and planets revolve, was threatened by an accumulation of discordant evidence.

However Church authorities, their theologians in hand, were eager to retain the idea because it helped sustain Biblical notions; and scientists were loyal to the “paradigm” they knew.  There was therefore massive resistance to changing the prevailing picture of the universe and of the earth’s place within it.

Accordingly, sixteenth and seventeenth century scientists ingeniously revised the Ptolemaic theory – adding on complications, epicycles, with a view to maintaining the doctrine of a stationary earth.

The Polish astronomer Nicolaus Copernicus (1473- 1543) advanced a different idea – that the sun, not the earth, remains stationary.  His view, properly elaborated, accommodated the available evidence with extraordinary elegance and simplicity.

Nevertheless, the “Copernican Revolution” took decades to triumph completely.  When it finally did, it transformed the science of the early modern era.

Even to the extent that these rival paradigms accounted for the same observations and made the same predictions, the Ptolemaic position was a dead-end; the Copernican alternative opened up new vistas.

Everywhere but in the United States, the theory and practice of health care provision underwent a Copernican Revolution in the last century.  The capitalist market paradigm, according to which health care is a commodity, gave way to the idea that health care is a right that governments have an obligation to provide.

Obamacare is a last gasp of the old regime.  Like the Ptolemaic theory, it can probably be made to work for a while longer – provided, of course, that Obama’s functionaries, like rear-guard sixteenth century astronomers, are up to the task.

In view of their incompetence so far, this may not be the case.  We will know before long.

In any event, we can take consolation from the fact that better positions usually do ultimately triumph; that Copernicus’ understanding, not Ptolemy’s, prevailed.

Only in America is the idea that health care is a universal right still considered a radical position.  Elsewhere, it is no longer even associated with the left.  It is just simple common sense.  That is how the Copernican view came to be regarded too – eventually.

Back in 2009, when Obama had political capital to spare, perhaps he could have gotten us there; but, for that, he would have had to be the man many then thought he was.

Instead, he didn’t even try — probably because he is as wedded to the status quo as any other mainstream Democratic or Republican politician.  He squandered a rare historical opportunity.

Still, just as Ptolemaic epicycles are better than sheer ignorance, Obamacare, competently administered, would be better than the status quo.

But the time is past due for a paradigm shift, a Copernican Revolution in health care provision, here in this last bastion of the old regime.

Until this happens, Americans will continue to pay more for less, and many will still be shut out of the system altogether.  Costs too will rise, siphoning off resources that could be put to more constructive uses.

If all goes well, Obamacare will serve as a temporary palliative.  What we need is a cure.

There is one at hand, of course, but we can’t get from here to there without upsetting the plutocrats who hold official Washington in thrall.  Count on Obama to fight against that every inch of the way.

In the final analysis, this is what is wrong with Obamacare.  Like the President himself, it is on their side; not ours.

ANDREW LEVINE is a Senior Scholar at the Institute for Policy Studies, the author most recently of THE AMERICAN IDEOLOGY (Routledge) and POLITICAL KEY WORDS (Blackwell) as well as of many other books and articles in political philosophy. His most recent book is In Bad Faith: What’s Wrong With the Opium of the People. He was a Professor (philosophy) at the University of Wisconsin-Madison and a Research Professor (philosophy) at the University of Maryland-College Park.  He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press).