Wednesday, February 03, 2010

If something cannot go on forever, it will stop. --Stein's Law

May 16, 1997
Herb Stein's Unfamiliar Quotations
By Herbert Stein

If something cannot go on forever, it will stop.
--Stein's Law, first pronounced in the 1980s

This proposition, arising first in a discussion of the balance-of-payments
deficit, is a response to those who think that if something cannot go on
forever, steps must be taken to stop it--even to stop it at once.


The New York Times
February 1, 2010
Huge Deficits May Alter U.S. Politics and Global Power
By David E. Sanger

... as Prof. James K. Galbraith of the University of Texas puts it,
“Forecasts 10 years out have no credibility”.

Simply projecting that health care costs will rise unabated is dangerous

His greatest hope, Mr. Galbraith said, was Stein’s law, named for Herbert
Stein, chairman of the Council of Economic Advisers under Presidents Richard
M. Nixon and Gerald R. Ford.

Stein’s law has been recited in many different versions. But all have a
common theme: If a trend cannot continue, it will stop.


Congressional Budget Office
November 2007
The Long-Term Outlook for Health Care Spending

Projections of Health Spending

Over the past 30 years, total national spending on health care has more than
doubled as a share of GDP. Under the assumptions described (in this CBO
report), according to CBO’s projections, that share will double again by
2035, to 31 percent of GDP. Thereafter, health care costs continue to
account for a steadily growing share of GDP, reaching 41 percent by 2060 and
49 percent by the end of the 75-year projection period.


GOP House Issues Conference
January 29, 2010

Congressman Paul Ryan (speaking to President Obama) “... Medicare, as you
know, is a $38 trillion unfunded liability...”.

Comment:  At over $2.5 trillion (almost 18 percent of our GDP), the level of
health care spending in the United States this year is almost intolerable.
Yet we hear predictions that health care will represent half of our GDP by
2082, and that Medicare will accumulate a deficit of $38 trillion.

Thank goodness for Stein's Law. We will never see these numbers for the
simple reason that this rate of increase cannot go on forever. It will stop
once it hits the wall.

Herbert Stein, being from the Chicago School of Economics (think Milton
Friedman), did not believe that steps must be taken to intervene since the
problem would take care of itself. Although that is true, the problem with
this sterile, amoral view, common amongst those of the Chicago School, is
that it ignores the consequences of a spontaneous economic process devoid of
the input from the heart and soul of beneficent public stewards.

To be clear, in the economics of health care, Stein's Law does not represent
one point in the expansion of health care spending at which everything stops
and the health care system collapses. Nor does it represent a single point
at which expansion stops and spending becomes static. Rather it represents a
multitude of various walls for various payers, including individuals,
employers and the various levels of government, each of which has its own
wall as a barrier represented by Stein's Law.

In our fragmented system of financing health care, Stein's Law is already in
play. Tens of millions are no longer able to afford health insurance. Tens
of millions more are no longer able to afford adequate insurance products
and must face the financial hardships of the underinsurance products that
have been the response of competing insurers in our market economy in health
care. The rate of employer-sponsored coverage has been declining because too
many businesses, especially small businesses, have already hit the wall.
Many states are struggling with the need to reduce Medicaid payments to
providers in order to try to include more under the umbrella, while watching
the safety-net of providers crumble from protracted financial losses. Even
the federal government is struggling to find ways to fill the void in the
face of massive budget deficits.

With Stein's Law, we can predict that the rate of spending increases will
very soon slow down, but under our current financing system, that will
inevitably result in more financial hardship, suffering, and even death as
health care access becomes ever less affordable.

Suppose the Senate bill passes, along with the reconciliation tweaks, then
what will happen? Since our beneficent stewards in Congress neglected their
duties, failing to adopt policies that would slow the growth in health care
spending, health care costs will continue to test Stein's Law.

Some of the multitude of walls will move, but none of them will go away. The
states will see their walls move further out with the infusion of Medicaid
funds. The federal government will see its wall move closer, signaled by the
shrill cacophony of the budget hawks. Employers will not see their wall move
much, but they will continue to barrel forward, eventually hitting it one by

But what about our hard-working, middle-income Americans? The wall will be
moved much closer. For several reasons, mostly related to costs, there will
be an attrition of employer-sponsored plans. Since the subsidies to purchase
private plans will be less than the employer contributions, fewer
individuals and families will be able to afford the plans. To slow the rise
in premiums, more benefits will be stripped out. The Obama administration
would accelerate this deterioration in benefits by imposing an excise tax on
the plans as "the most effective way to control costs." The Obama/Orszag
policy of controlling costs by erecting financial barriers to necessary
health care is a very sick policy indeed. The legislation before Congress
adds afterburners to middle-income Americans only accelerating their trip to
Stein's impenetrable wall.

When our economic models have immoral consequences, we should abandon the
amoral models of the Chicago School, and move to normative economics. It is
not a sin for an economist to have a heart.

Under a single payer national health program - an improved and expanded
Medicare for all - Stein's wall will still be there. But instead of letting
the entire system crash into the wall, our own beneficent public stewards -
if we elect ones with a heart - will be there to make sure that everyone
receives the care that they need. The resources that we use may take us up
to the wall, but we won't be crashing into it.

Every other industrialized nation has an impenetrable Stein wall, but by
using normative economics, they don't sacrifice their citizens by slamming
them into that wall.

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