The free-lunch fal­lacy is hurt­ing our coun­try, health care, re­tire­ment.

The Washington Post Sunday - - BUSINESS - AL­LAN SLOAN al­lan.sloan@wash­post.com

One of the big­gest prob­lems our coun­try has is the grow­ing idea that there re­ally is such a thing as a free lunch: that we can get magic money to pay for things we don’t want to pay for out of our own pock­ets.

I think the free-lunch fal­lacy helps ex­plain why three of our na­tion’s big­gest prob­lems seem so in­tractable: hav­ing a ra­tio­nal health-care sys­tem; pro­duc­ing a rea­son­able fed­eral bud­get; and deal­ing with the “re­tire­ment cri­sis.”

Let me ex­plain how I came up with this link­age.

As a born con­trar­ian — okay, as a stub­born old guy — I tend to do the op­po­site of what’s pop­u­lar. So in­stead of rush­ing to opine about the new­est ex­cesses en­velop­ing Our Na­tion’s Cap­i­tal, I de­cided re­cently to spend quan­tity time read­ing two books that in­ter­ested me, tak­ing some deep breaths and do­ing some think­ing.

Both of the books — “An Amer­i­can Sick­ness” by Elisabeth Rosen­thal (Pen­guin Press, 2017), and “Dead Men Rul­ing” by Gene Steuerle (Cen­tury Foun­da­tion Press, 2014) — of­fer amaz­ingly help­ful his­tory and in­sight into how our health care and fed­eral bud­get sys­tems, re­spec­tively, have turned into such messes.

In ad­di­tion, I got a bonus. Be­cause I read both books at the same time, I saw the “free lunch” link be­tween them. That, in turn, led me to get some stock and bond num­bers that help ex­plain why we as a na­tion haven’t set aside enough money to pay for baby boomers’ re­tire­ment.

Health care first. Rosen­thal art­fully tracks the way medicine has be­come a busi­ness dom­i­nated by giant health-care con­glom­er­ates that try to shake more money out of in­sur­ance com­pa­nies and hap­less unin­sured peo­ple by charg­ing ab­surd amounts for pro­ce­dures, cre­at­ing out­ra­geous fees and im­pos­ing sep­a­rate charges for al­most ev­ery­thing.

She of­fers count­less, en­rag­ing ex­am­ples of peo­ple burned by the sys­tem, and of doc­tors and other med­i­cal pro­fes­sion­als frus­trated by health-care firms’ in­ter­est in goug­ing peo­ple rather than help­ing them.

The money-from-the-sky the­ory is the idea that the more you charge, the more you’ll get. Es­pe­cially if you be­come a giant health con­glom­er­ate that dom­i­nates a city or re­gion. A med­i­cal in­surer, be it Medi­care, Medicaid or United Health­care, will gen­er­ally pay only a ne­go­ti­ated rate. But hav­ing in­sanely high charges gives you a chance to gouge unin­sured suck­ers or in­sur­ance com­pa­nies whose pol­i­cy­hold­ers are us­ing your fa­cil­i­ties out of net­work.

If you look at the “Ex­pla­na­tion of Ben­e­fits” that ar­rives af­ter you get in­sured med­i­cal care, you see the huge dif­fer­ence be­tween the stated price of a pro­ce­dure and what your in­surer pays for it.

For ex­am­ple, Medi­care re­cently got a $29 bill be­cause I had blood drawn as part of my an­nual phys­i­cal. The Medi­care price: $3. That’s 89.7 per­cent less than what RWJBarn­abas Health, the New Jersey colos­sus that has bought up the prac­tices of al­most all the doc­tors I use, would have tried to get from me if I didn’t have in­sur­ance.

Then there’s the charge for the con­trast mat­ter used in my wife’s CT scan. The stated price: $20. The Medi­care price: 12 cents, 99.4 per­cent less than what Barn­abas would have sought from a sucker.

I don’t buy Rosen­thal’s idea that peo­ple can suc­cess­fully em­power them­selves to get cheaper CT scans or blood tests. It seems ivory tower to me. I think the way to deal with the goug­ing prob­lem is to re­quire health-care com­pa­nies to charge unin­sured in­di­vid­u­als the same rate they ne­go­ti­ate with Medi­care.

Health care — more pre­cisely, the ris­ing cost of health care — is an im­por­tant part of Steuerle’s bud­get book. He shows the hor­ri­fy­ing evo­lu­tion of the fed­eral bud­get from some­thing ne­go­ti­ated by peo­ple in power into a mon­stros­ity cre­ated by former play­ers (the metaphor­i­cal dead men) un­der which es­sen­tially all fu­ture tax rev­enue growth is com­mit­ted to things like in­fla­tion ad­just­ments, growth of Medi­care and Medicaid, and to cover the ever-grow­ing bud­get losses for things such as mort­gage in­ter­est and the cost of em­ployer-paid med­i­cal in­sur­ance.

Steuerle as­tutely at­tributes this prob­lem to a fi­nan­cially toxic mix of Key­ne­sian ide­ol­o­gists for whom no spend­ing plan is too ex­pen­sive be­cause it will cre­ate jobs and pay for it­self, and sup­ply-side fa­nat­ics for whom no tax cut is too large be­cause it will cre­ate jobs and pay for it­self. In other words, folks on the left and right keep push­ing for a free lunch.

Some­times, like to­day’s sit­u­a­tion, it’s the sup­ply-siders’ turn to ar­gue that gi­gan­tic tax cuts pro­posed by Pres­i­dent Trump will pay for them­selves. Down the road, in 2020 or 2024, it’s easy to fore­see a Key­ne­sian crew in power that will pro­mote mas­sive so­cial spend­ing in­creases to sup­pos­edly ex­pand the econ­omy.

The so­lu­tion, ob­vi­ously, is to get grown-ups into power in Wash­ing­ton who are ca­pa­ble of com­pro­mis­ing with each other and star­ing down their par­ties’ ex­trem­ists. I don’t know how to make that hap­pen, but I hope it hap­pens soon. I’d like to see the

Magic mar­kets are gone. For good.

growth of gov­ern­ment spend­ing on my gen­er­a­tion — I’m 72 — slow down, and the growth of spend­ing on my grand­kids’ gen­er­a­tion rise more rapidly.

Now to re­tire­ment sav­ings, which for a gen­er­a­tion ben­e­fited from magic money coined by Wall Street. I’m talk­ing about the now oft-for­got­ten fab­u­lous bull mar­ket in both stocks and bonds that ran from Au­gust 1982 through March 2000. Which were the fi­nan­cially for­ma­tive years for a good chunk of the baby boomer gen­er­a­tion.

Dur­ing those 17-plus years, the Stan­dard & Poor’s 500-stock in­dex pro­duced a to­tal re­turn (stock price in­creases, div­i­dends and rein­vested div­i­dends) of 19.73 per­cent a year, com­pounded, ac­cord­ing to sta­tis­tics I got from AJO, a Philadel­phia money man­age­ment firm. Bonds also did great, pro­duc­ing an av­er­age of 10.35 a year, com­pounded. So your money in stocks dou­bled about ev­ery 3½ years, and bond money about ev­ery seven years.

Op­ti­mism reigned. Peo­ple fool­ishly pro­jected those gains into the far fu­ture. Even though pen­sions were start­ing to get sup­planted by 401(k)s, re­tire­ment seemed a sure thing. Ac­counts grew and grew.

Both cor­po­rate and gov­ern­ment pen­sion funds de­cided they could cut back on con­tri­bu­tions be­cause money was fall­ing from the sky, cour­tesy of the fi­nan­cial mar­kets. Peo­ple saw lit­tle need to boost sav­ings, ei­ther.

Oops. Magic mar­kets are gone. For good. Since the boom ended 17 years ago, AJO says, stocks have re­turned only 4.77 per­cent a year, and bonds 5.15. That means stock val­ues have been dou­bling ev­ery 15 years rather than ev­ery 3½, and bonds have dou­bled ev­ery 14 years rather than ev­ery seven.

The so­lu­tion isn’t to await the re­turn of magic mar­ket money. It’s to deal with what we’ve got. We col­lec­tively will have to ei­ther work longer, save more, lower our ex­pec­ta­tions — or some com­bi­na­tion of the three.

The bot­tom line: As a con­trar­ian, I don’t sub­scribe to the the­sis that our coun­try is hope­lessly di­vided and that we need rad­i­cal change of some sort. This is a great coun­try, and we can solve these prob­lems and many oth­ers if we as a so­ci­ety are will­ing to com­pro­mise. We used to do that, and we can do it again. We don’t need magic money. What we need is com­mon sense.

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