Professor Cole's Finance Blog

Today, I taped an interview (Is the Stimulus Paying Off?) with Tom Hudson of First Business on whether or not the administration's $787 billion Stimulus Package is paying off. The discussion started with reference to the $3 billion "Cash-for-Clunkers" program, which provided rebates of up to $4,500 for buyers of new cars that traded in their "clunkers."

There are at least four lessons we can learn from the "Cash-for-Clunkers" program that are instructive as the administration and Congress push for an overhaul of our health-care system.

(1) The government always under-estimates demand for, and costs of, such subsidies.

The original outlay for clunkers was estimated at $1 billion. The final cost will exceed $3 billion. Expect the cost of the health-care overhaul to be at least three times what is originally estimated.

(2) The government always under-estimates the bureaucracy needed to deal with new programs.

Originally, the government assigned 300 workers to the clunkers program, which turned out to be woefully inadequate (see point (1)). This week, the government announced that it has added 800 workers for a total of 1,100 bureuacrats working on this program, which, by the way, has now expired. Once hired, never fired. Expect the size of the government's health-care bureaucracy to grow like a bad rash, once passed.

(3) We all pay for the costs of these programs, but few of us benefit.

Roughly half a million U.S. residents will receive the "clunker" rebate, but the program will be paid by all U.S. federal taxpayers. Then again, more than half of all U.S. residents pay no federal income tax, so it the the rest of us suckers that are stuck with the costs of these programs. With the proposed health-care overhaul, the CBO estimates that about 12 million uninsured U.S. residents will gain new coverage, but at a cost of more than $1 trillion over ten years, or more than $8 thousand per year for each newly insured resident. If lesson (1) holds true, expect this to triple to $24 thousand per year.

(4) The government never considers unintended consequences of its programs.

At a time when most U.S. consumers are deeply in debt, the government has enticed more than half a million of them to take out car loans in amounts at least four times the subsidy provided, or more than $12 billion in new consumer debt. How many will this push over the edge and into bankruptcy as the economy continues to deteriorate? Only time will tell.

What will be the unintended consequences of the proposed health-care overhaul? It is instructive to remember how we got our current system that relies upon employer-provided benefits. This system came about during World War II when the government imposed wage-and-price controls at time when labor was scarce. To compete for these workers, employers gamed the system by offering "free" health insurance to new workers. Once the war ended, this new system remained in place. Insurance companies then learned to use employers as convenient "risk-pools" for calculating actuarial losses. Now, if you are not in such a "risk-pool," you fall into the high-risk "pool" of individuals without employer provided benefits and will be charged high premiums for an individual policy.