Thursday, December 29, 2011

Various European Central Bank Topics

Interesting things in Europe, where threats of various economic crises seem to have abated but not disappeared.

While Mario Draghi, the relatively new head of the European Central Bank, has been strident in saying that the ECB cannot be the lender of last resort to European governments, it seems that his actions are different from his words. Last week, the ECB opened up low interest (1%) three year loans to European banks in a "liquidity-providing operation" and banks promptly borrowed €489 billion. And this week, it was reported that the ECB's balance sheet had grown to €2.73 trillion, €553 billion higher than three months ago.

And as background, we have French President Sarkozy encouraging banks to run a "Sarkozy carry trade," that is, borrow from the ECB at 1% and invest it in sovereign government bonds that yield close to 7% (Italy). In fact, the ECB will even take those bonds as collateral on the loans! Not a bad deal if you can get it!

The expansion of the ECB balance sheet is of course from its lending program, among other things, and it represents an injection of high powered reserves into the European banking system. It seems to me to be quantitative easing, the new terminology for what we used to just call expansion of the money supply through open market operations.

By itself, this is not a bad thing, and in times of a liquidity crunch, such expansion is called for. However, there are some worries in the European situation. Are the loans to the European banks to help them with liquidity problems, or are the loans to the banks just a back-door way for the ECB to buy European government bonds? There certainly seems to have been an impact, as yields on Italian and Spanish bonds have fallen.

John Cochrane has a great editorial on many of these matters. Cochrane emphasizes how European banks have huge risks, as they have loaded up on sovereign bonds, and now they have even more incentive and ability to do so. And all this sovereign debt gets a zero weighting in the regulatory bank capital schema, meaning that it is considered risk-free!

To the extent that European banks run the Sarkozy carry trade, there is an interesting divergence between the US central bank policy and what the ECB is effectively doing. During the US credit crisis (post-Lehman) the Fed pumped up its balance sheet, partly through a policy of buying mortgage bonds issued by FannieMae and FreddieMac. This sounds similar to the ECB buying up bonds of Italy, Portugal and Spain. However, with the Fed and in the US, the bad practices that got us into the mess had ended -- the subprime market was shut, and even Freddie and Fannie tightened significantly their lending practices (so much so that it is too hard now for people to get a mortgage). In Europe, it is not yet clear that the government policies that got them into trouble have really been fixed. And the bonds sold by those governments are now on the balance sheet of the ECB.

Sunday, December 18, 2011

Of Competition in Health Care, and Law Schools Too

Yesterday I wrote that not much had been said about the new Wyden/Ryan “defined contribution” plan for Medicare. I guess I had not searched enough, for later I came across this piece by Krugman, Ron Wyden, Useful Idiot and in it he references a posting by Ezra Klein, Competition Hasn't Worked in Health Care.

Krugman's title is certainly choice, but besides that, we have these additional tidbits:
... Sen. Ron Wyden did indeed do a bad, bad thing in his joint proposal with Paul Ryan...So why would anyone who isn’t a right-wing ideologue propose that kind of degradation?
Also, Krugman states that
Looking both within the United States and across countries, if you ask which systems are best at cost control, the ranking looks like this:

Government provision as well as financing (socialized medicine) > single payer > market competition
The problem here is that Krugman is very careful to do his ranking only in regard to cost. The problem of Medicare is not just one of cost, although the public debate is focused on that. Everyone knows that there are consequences of holding down costs in the wrong way, for example, if the "doc fix" did not go into effect and doctors' reimbursements were to fall by 30%, there would be quality/access consequences. Even I have said that in the UK, with health care providers being employees of the government and all prices set by the government, you should be able to keep prices low. The problem of Medicare is one of providing high quality care at a cost that is politically acceptable. By framing the debate only around cost, Krugman simplifies things too much.

Krugman also states as his first reason for why competition can't work in health care: "Patients by and large don’t have the information to evaluate medical treatments... and he attributes this, rightly, to Kenneth Arrow some time ago. I will return to this "lack of information" idea below.

Ezra Klein is a little less vitriolic, but his thesis is that competition has never worked in health care and he asks for examples. Klein suffers from the same limitation of Krugman, which is that he focuses on the role of competition in helping to hold costs down, rather than the more relevant question of whether competition helps produce a (cost, quality) package that is more preferred. Klein crosses the border sometimes, however, and is less careful than Krugman to say that he is only talking about the ability of competition to hold cost down.

But let me take a shot at some that have worked even just on the cost side: Any self-insured employer with any sense puts its third party administrator contract up for bid occasionally, and lets health plans compete on price and quality. Health plans actually worry a lot about trying to control cost and improve care. Take a look at some of the cost control plans by BC/BS in Massachusetts. Or look at the number of instances in the past several years where a health plan has cut a hospital out of its network because that hospital's costs were too high. In my neighborhood, a company spun out of work from researchers at The Dartmouth Institute, Health Dialog, was sold to Bupa, a private for-profit British company with health insurance interests, for $775 million. One of the goals of Health Dialog is to help patients make more-informed decisions, which will result in better quality of care and often in lower cost. Folks might not look at something like Health Dialog as part of competition, but it is: It was a for-profit startup, funded by venture capital, and sold in a competitive marketplace to a larger company. The number of for-profit health care startups in our economy is large, and many of them are focused on cost control as well as better quality. In Hanover, we just had Iora Health, a for-profit startup, announce that it will be opening a new kind of primary care facility. I know that the intent here is to not only improve the coordination of care, but also to reduce cost. This is competition! In a government-financed and government-provided system, would we get such innovation?

Klein tries to negate the idea that the competitive bidding process for Medicare Part D is not responsible for its good performance, but there is no way he is going to succeed at that...just as I cannot succeed at saying the bidding process is mostly responsible for the good performance. However, there is a competitive bidding process, it works in establishing prices and giving choice, and I do know that companies think very seriously about how to bid in these auctions (this from talking to people who have advised companies in the bidding process). Note that I am NOT saying there are not issues with Medicare Part D, especially in regard to its complexity and some specific faults of its bidding process.

Consumer choice and competition "works" not just in Medicare Part D but also in the Federal employees health plan (competing plans with consumer choice) and in many countries, particularly Switzerland, where citizens (under an individual mandate) choose privately offered health insurance plans. Does "works" necessarily mean lower costs? No, of course not -- in what marketplace or for what product or service do we care only about cost (some, sure, but none with the complexity and importance of health).

Other areas where competition has worked in health care, to produce lower costs and/or higher quality? Production and marketing of generic drugs? Drug competition it really from the good will of the pharma companies that we get less costly ways to produce drugs? How about even much of the competition between hospitals? Yes, there are stories about how competition between hospitals results in an arms race for advanced medical equipment, but even in my local area there is some competition (smaller hospitals) for certain services in the hospital market, and it gives local consumers a cheaper and different alternative to the big medical complex known as Dartmouth Hitchcock. Local private practice doctors also provide a competitive -- yes, competitive -- alternative to doctors employed by DH. In the Boston market, it is at least legitimate to raise the question of whether the merger of major hospitals into the Partners group caused a significant decline in competition and increased medical prices -- see here, for reference to the MA Attorney General report on prices in Boston.

I could actually go on for some time showing where competition works in health care. Even given the unfair tilt towards focusing only on cost reductions, it is easier to answer than I thought it might be.

The better question is what things would look like if we did not have competition at all, say with a single government financed, government provided health care system.

At the heart of Krugman's dislke for a defined contribution Medicare plan (and Klein's too, I think) is this idea that consumers are just not informed and rational enough to make good decisions.

Instead of arguing about that one directly, let me note this other story from the NYT this morning, on how the American Bar Association puts all kinds of accreditation standards onto law schools. The thrust of the article's thesis is that the ABA makes all law schools meet very high quality standards (such as the number of full time vs. parttime faculty) so that there are no cheap law school alternatives.

Ah, but what would happen if we loosed different kinds of lawyers onto the ill-informed, irrational citizens that inhabit Krugman's and Klein's world? Obviously, the public needs to be protected from competition:
Members of the A.B.A. Section say the point of the standards is not to raise the cost of law school, or to limit competition. The point is to ensure that lawyers are well trained and that the public gets quality legal services.

”It’s pretty basic, and more or less the accreditation function that you’ll see for any profession,” says John O’Brien, chairman of the Section and dean of the New England School of Law. “You want to make certain that a school that is nationally approved is providing students with what they have a right to receive in terms of education. And at the other end you want to protect the public and make certain that graduates who offer themselves as qualified lawyers know what they’re doing.”

Saturday, December 17, 2011

The Wyden/Ryan Medicare Plan

Sen. Ron Wyden and Rep. Paul Ryan have a new plan for Medicare. It has gotten a surprisingly low amount of attention -- maybe the Republican primary is taking media precedence.

The proposal can be read here.

The main components of the plan are, in my order of interest/importance:

1. Seniors would choose their health coverage from competing plans on an exchange (the Medicare Exchange), similar to the way Medicare Part D works now. (Medicare Part D is prescription drug coverage. Companies wanting to offer drug coverage under the plan bid in regional markets and enrollees select their coverage from the offers made.) Plans would have to be approved, meaning that they would have to meet certain minimum standards of coverage.

2. The amount to be given to each enrollee as a subsidy for buying insurance would be determined by the auction. This subsidy would be either the second-lowest bid in the auction or the standard Medicare fee for service plan. See point 3 next.

3. One of the options would remain the standard Medicare fee for service option. This is not clear to me, but I guess the meaning is that the Federal government would have to put in a bid just like a private company. I am not sure what would prevent the government from always winning the auction, since they play with OPM (other people's money).

4. Exchanges would be on a regional basis, as for Medicare Part D.

5. If costs rose faster than 1% above nominal GDP growth, unspecified cost controls would kick in.

The idea deserves serious consideration. Moving Medicare toward a voucher/defined contribution plan makes a lot of sense to me. Such a change would get the government out of specifying how much providers are paid, leaving that to private insurers as is currently done (private insurers negotiate with hospitals and doctors to determine contract prices). Using a competitive bidding process to both select plans and to determine the subsidy amount seems to work well for Medicare Part D, so let's extend the model.

One of the interesting things will be if the subsidy is determined regionally or nationally. If done nationally, there will be some pain as enrollees in the high cost regions (see the Dartmouth Atlas) discover that their subsidy is not enough to buy any plan in that region. That would probably put more effective pressure on the high cost regions than anything the Center for Medicare and Medicaid seems able to do.

Wednesday, December 14, 2011

Al Gore's Manifesto for Sustainable Capitalism

Al Gore and David Blood wrote an editorial in the WSJ titled a "Manifesto for Sustainable Capitalism."

A fair amount of this is actually fine -- essentially an argument for including what are now externalities into the economic calculus of firms and consumers. That is sound economics and policy. Of course, what the level of the externality is, in dollar terms, for any specific environmental problem is always a key question. I like to ask what I view as a telling question: What do you think the carbon tax should be, on the basis of a barrel of oil or gallon of gas?

But of course I could not read an article by Al Gore without having some arguments. This quote:
Before the crisis and since, we and others have called for a more responsible form of capitalism, what we call sustainable capitalism: a framework that seeks to maximize long-term economic value by reforming markets to address real needs while integrating environmental, social and governance (ESG) metrics throughout the decision-making process.
does worry me. Two things: first, what exactly is a "real" need? Who determines that? Is my desire for a fast car a real need? How about my desire for imported Scottish salmon?

The other thing that is a bit odd is the focus on long term value (I do like the metric of economic value, though). Yes, I do agree that there is at times too much focus on the short term. Examples abound. But to have one of the major actions proposed being an end to quarterly earnings reporting? That seems a stretch. Have they really thought out the unintended consequences of letting managers report only once or twice a year? I suppose my students might want grades to be issued only at the end of each year, yet I continue to push for grading at the end of each course.

So Laws do Work!

Amazing. The new health care act requires employers who offer health insurance to employees to cover children up to the age of matter whether those "children" live at home, work elsewhere, are in college or not...

And with this mandate in place for almost a year, the Administration reports that almost 2.5 million additional young adults have received coverage.

We should not be surprised that this part of the health care law works.

I am a little ambivalent about it. Hopefully nobody thinks it comes for free, as any employer who falls under this mandate will experience additional costs. Those costs are generally going to be borne by employees, through higher health care premia, lower wages, and fewer jobs. Any self-insured employer could have offered such coverage on their own in the past; the fact that they did not might reveal that employees were not willing to bear the cost.

I also don't really like the principle and economics of making an employer responsible for the health care of a 25 year old who has nothing to do with that employer other than being the child of an employee. There is really nothing the employer is going to be able to do to influence the health of that individual (for actual employees, the employer might be able to do some things in the workplace to improve health). The law also really makes parents continue supporting their children well past the usual age where the youngsters are pushed out of the nest. Heck, why don't we mandate college tuition to be covered too?

The nice aspect of the law is that it does get young adults into the health insurance market during a time when they might choose to go without coverage. It seems to me that this law coupled with a "continuous coverage" provision would go a long way to making an individual mandate less necessary. So kids get covered through 26 with employer coverage; if they want health insurance at any other point in their life, let insurers put in a continuous coverage clause: an insurer must issue coverage so long as the individual has had continuous coverage. If someone has not had continuous coverage, have a high risk pool available, but make there be a cost to not maintaining continuous coverage.

Sunday, November 20, 2011

Leverage Limits vs. the Euro Discipline Rules

Much blame has been put on the 2004 regulatory change in the US that let investment banks increase their leverage and also changed the general regulatory regime to one of more self-regulation. See my post here and the related posts.

It is interesting to compare the attention that rule change received to the amount of recent coverage I have seen (almost none) on the rule changes in the Eurozone that let member countries run higher deficits and higher debt levels than the original pact allowed.

IN 2002, France and Germany ran deficits in excess of 3% of GDP, which the original Stability and Growth Pact allowed. By 2004, Greece, the Netherlands, Portugal and Italy were also beyond the limit. See Feldstein, "The Euro and the Stability Pact.

Nothing was done to the violators.

In March of 2005, the Pact was changed to make the limits even less meaningful: see the summary summary available here.

Also see the comment at the time by the European Central Bank:

21 March 2005 - Statement of the Governing Council on the ECOFIN Council’s report on Improving the implementation of the Stability and Growth Pact

The Governing Council of the ECB is seriously concerned about the proposed changes to the Stability and Growth Pact. It must be avoided that changes in the corrective arm undermine confidence in the fiscal framework of the European Union and the sustainability of public finances in the euro area Member States. As regards the preventive arm of the Pact, the Governing Council also takes note of some proposed changes which are in line with its possible strengthening.

Sound fiscal policies and a monetary policy geared to price stability are fundamental for the success of Economic and Monetary Union. They are prerequisites for macroeconomic stability, growth and cohesion in the euro area. It is imperative that Member States, the European Commission and the Council of the European Union implement the revised framework in a rigorous and consistent manner conducive to prudent fiscal policies.

More than ever, in the present circumstances, it is essential that all parties concerned fulfil their respective responsibilities. The public and the markets can trust that the Governing Council remains firmly committed to deliver on its mandate of maintaining price stability.

Wednesday, November 16, 2011

The Health Care/Jobs Bill

It appears that the Patient Protection and Affordable Care Act has morphed into the jobs bill -- see this Reuters story.

The essence of the new initiative is that up to $1 billion (of the $10 billion set aside for "innovation" at the Center for Medicare and Medicaid Services (CMS)) will be used as grants for people who come up with good ideas to save money and improve care.

Ah, but the wrinkle is this:
"To get a grant, projects must start within six months and the program will concentrate on those ideas that spur the most hiring and workforce training, the Department of Health and Human Services said."
Here we have a perfect example of economic engineering. Give grants/subsidies/impose taxes, with a variety of specific constraints, all meant to achieve what some policymakers think is the current objective.

But what if the projects that save the most money are the ones that lay off a bunch of health care workers? Funny, but at our local hospital, layoffs are proceeding at a rapid rate. So we will have one set of incentives to lay people off and another set of incentives to hire new ones...but only in certain areas..."shovel ready health care projects."

The health care bill is starting to look like our tax code, and it hasn't even kicked in yet.

Sunday, November 06, 2011

Interesting Issues on Greek Debt: Non-Participation in Exchange, and Non-Trigger of CDS

It is interesting that the 50% writedown on Greek debt applies only to privately held debt (held by banks and I guess any other private individuals or institutions) NOT to the bonds held by the European Central Bank. (I believe that any bonds held by the European Financial Stability Facility will be excluded as well). The Economist notes the matter; also see this Bloomberg story.

How this discrimination actually works is interesting. The writedown is voluntary, and will be effected by an exchange of old bonds for new ones at some time in December. It seems that anyone is free to forego the exchange, and that will include the ECB. Holding on to your old bonds, however, will put you at some risk that the terms of those bonds will be changed down the road, along the lines of squeezing minority shareholders.

Why is the deal is struck this way, to allow the ECB and other public entities to avoid a loss? There is a cost: if the public sector holders also took part in the exchange, then the Greek solvency problem could be solved with a smaller writedown. That is, if the private sector only holds 60% of outstanding Greek debt, then a 50% writedown on that is equivalent to a 30% writedown on 100% of the outstanding debt.

What would happen if the ECB had to write down the value of its Greek debt? Would that be a problem for its balance sheet? Maybe.

Another possible explanation for the discriminatory treatment is that the purchases of Greek debt by the ECB were to help the banks in the first place, and those purchases might have been at close to face value. So letting the ECB avoid the writedown and putting more of it on the banks is just ex post recognition that the banks owned all this debt in the first place.

This situation also creates the potential for some private holders to not do the exchange, essentially casting their lot in with the ECB. How that strategy will play out is anyone's guess.

The second interesting thing is that the voluntary exchange will not, it appears, qualify as a credit event that would trigger credit default swap payments. CDS would normally be triggered if timely interest and/or principal payments are not received, and I guess an exchange does not meet that test. I have often had students question the idea of "voluntary" exchange in situations where one party is under duress. In this case of a voluntary bond exchange, I must admit to thinking that the definition of "voluntary" is sounding pretty Clinton-esque. I imagine there are some European banks who bought CDs to hedge the default risk of their Greek bonds and are pretty unhappy now to see that the insurance will not pay out.

Of course, none of this is written in stone yet...the last installment of bailout money to Greece has been held up by the political turmoil in Greece after Papandreou said he would put the deal to a vote.

Friday, October 14, 2011

Long Term Care Insurance, RIP

The Obama Administration made a late Friday announcement to finally pull the plug on the long term care part of the health care bill. This long term care plan was known as CLASS, for Community Living Assistance Services and Support. It was designed as a supplemental insurance plan, with people paying premiums during their younger years in return for support when disabled later.

The plan had fundamental economic flaws, deriving from adverse selection effects: the program to be financially sustainable had to have a lot of healthy premium payers and relatively few payees. Analysis suggested that would not happen, with the program instead attracting initially unhealthy patients who would receive benefits for too short a period to cover their costs. If premiums were increased, the adverse selection would only grow worse.

A good description of CLASS is given by the Kaiser Family Foundation here.

Most interesting is that the Congressional Budget Office (CBO) credited CLASS with reducing the Federal deficit by $70 billion over the 10 year period that was used to measure the financial effect of the health plan. How does that fit with a plan that is now recognized as financially unsustainable? Well, there is a 5 year vesting requirement, so over the first 10 years of the plan, more money comes in than goes out...but it all falls apart in the later years. The savings projected from CLASS helped the bill to gain votes and be passed. (Interesting that adverse selection would work so strongly even with the 5 year vesting. I would like to see some of the models that have been used to analyze the program.)

How many other parts of the health care bill were designed as poorly as CLASS? And how much were "savings" from such ideas relied on to get the bill passed? What would happen if CBO were to re-score the bill now?

Wednesday, October 12, 2011

Health Confusion -- or Consistency?

Two contrasting and interesting issues in health care arose in the last week.

First, we have the US Preventive Services Task Force recommending that men not get routine PSA tests to screen for prostate cancer. See here for one of the thousands of articles reporting the recommendation. Without going into too much detail, I would summarize the recommendation as being based on the test being relatively uninformative, especially in regard to distinguishing between cancers that will progress dangerously versus those that will remain contained. Further tests beyond the PSA -- biopsy -- run risks themselves, and are also unable to finely distinguish cancer types.

The recommendation runs afoul of a core principle in information economics, which is that more information is at worst valueless (and the recommendation is not based on cost of the test).

There are subsidiary assumptions that can make a test be of negative value, but I would like to see them laid out (for example, reliance on an expert for further actions, with that expert biased by an agency problem).

I continue to be bothered by this idea of not having a test. As one of my colleagues put it: Suppose a doctor did a PSA test on you and emailed you the results. You are saying that you would pay for a spam filter to keep from knowing the result? I think it is possible to set up an optimal decision rule based on test results, which given a noisy test, will often lead to no action. But in some extreme cases, it will lead to a biopsy, identification of a severe grade tumor, and surgery that is valuable. The key is to not taking action for many outcomes.

Second, we have a bill in California, passed by the CA legislature, that would REQUIRE doctors to inform women that their mammogram revealed they have "dense" breast tissue. Now I am really venturing outside of my area of even limited expertise, but the idea here seems to be that dense breast tissue can prevent a mammogram from revealing small tumors. So if women have dense breast tissue, their mammogram might not be as accurate, and they might want to have a different screening test.

Governor Jerry Brown vetoed this bill by the way.

So on the one hand, we have a recommendation that men NOT be given a test for cancer, partly on the grounds that it would lead to more testing, while on the other hand we have a law saying that women MUST be given information that will cause those women to have more tests.

While there might be some inconsistency here, the consistent theme is that consumer/patients are not good at making health care decisions.

Monday, October 10, 2011

Medical Marijuana Confusion and Irony

Another story that hit while I was in San Francisco concerns a new crackdown by the US Department of Justice over medical marijuana dispensaries -- see, for instance, "Feds' confusing crackdown on medical marijuana."

Based on my anecdotal evidence, the medical marijuana road is indeed a slippery one. Getting a prescription seems relatively easy, with prescribing doctors and dispensaries sometimes vertically integrated. And allowing medical card holders to grow their own probably allows a reasonable amount of pot to get into the general marketplace.

Irony abounds in the politics around marijuana. The Republicans, who generally favor individual liberty in the economic sphere, want to restrict our ability to do what we want with our bodies and brains. The Democrats, and the liberals, while favoring liberty in the social sphere (to their credit, I would editorialize) generally like to restrict our economic freedom. I trust the Libertarians are the only philosophically consistent ones.

And now we have the Obama administration, that up to now was averting its eye from medical marijuana, getting quite aggressive about policing the dispensaries.

One of the more interesting policing actions is that the Feds have sent letters to LANDLORDS of medical dispensaries, threatening them with alleged violations and pointing out that the penalty could be confiscation of the property.

Maybe this is why there are actually delivery services for medical marijuana in California -- the cost of renting physical property has been pushed up by the threat of confiscation??

Friday, October 07, 2011

Fleet Week in San Francisco!

I have been in San Francisco for the last two days,with one of the true highlights being a very impressive demonstration of US military might -- right over the City! I guess it is Fleet Week, and the Navy's Blue Angels have been flying over the city, showing off really nicely. The jets scream -- literally -- right over the tops of the buildings. Amazing and pretty frightening at times.

The irony of this display going on over liberal San Francisco makes it all the better. I understand that Senator Diane Feinstein actually came up with the idea for Fleet Week.

Friday, September 02, 2011

Shut Out

The August 2011 employment report shows that nonfarm employment in August was exactly what it was in July, for a net increase of zero jobs: "Nonfarm payroll employment was unchanged (0) in August, and the unemployment rate held at 9.1 percent, the U.S. Bureau of Labor Statistics reported today."

That is tough, especially with Obama giving a jobs talk next Thursday. There is something about that number zero that stands out.

Why is employment growth so slow? Nobody really knows of course. Animal spirits, as Keynes might have said, are not very aggressive right now.

I would point out some of the regulatory issues, however. The health reform act, whatever we think of its merits, was passed right when we were emerging from the recession. I wonder how many people actually know its major taxes and penalties? A few colleagues of mine just the other day discovered that the Medicare tax will be increasing for them. And for employers, do they really understand what the employer mandate does? If they don't provide insurance, there is a $2,000 fine for every employee they have, if even one employee buys subsidized insurance on an exchange. And if an employer provides insurance but it is not "affordable" then there is also a fine. The details are excruciatingly difficult to understand.

Obama's reversal today on ozone rules reflects at least a recognition of the political aspects of new regulations.

In my own world of academia, there is a new set of conflict of interest rules issued by National Institute of Health. Whereas before, researchers had to report their investments only when they believed a conflict existed, the new rules require researchers to report investments that are related to any of their institutional responsibilities, instead of only ones that are related to research activity. It will be up to the university to figure out if the investment is related to the research and if a conflict exits. This will require significant work. Again, whatever we think of the merits, let's be sure to understand the costs. (And let's not think of this as employment-increasing!)

Saturday, August 27, 2011

Update on the Calm Before Storm

Two more pictures, looking east over Goose Pond, New Hampshire. Definitely the calm before the storm. Even the loons are acting strange...scooting across the water chasing each other.

The Calm Before the Storm

Above are two pictures of the Connecticut River in the Upper Valley of NH/VT -- just a few miles upstream of Hanover, NH.

As you can see, the water level is very low. Someone is looking ahead, and opened all the dams downstream to pull as much water out of the watershed as possible. With several inches due from Irene starting tonight, I greatly appreciate that.

Should be an interesting 24 hours. I do believe that the MSM has exaggerated the risk from this one and are not adjusting to Irene's weakening. But there will still be a lot of wind and water in areas that are already waterlogged.

Thursday, August 25, 2011

Federal Spending Update

The WSJ has a fine editorial today on the growth of Federal spending (see my related post below).

They report, on the basis of a Congressional Budget Office update, that the Federal government will spend an all-time record this fiscal year (which ends Sept. 30) -- $3.6 trillion dollars. That will be almost 24% of GDP.

The Journal article includes this chart, which shows the tremendous increase from 2008, and how the new level of Federal spending is looking more like a permanent new track rather than a temporary increase due to stimulus. All of this is consistent with my post below.

Also, it is interesting to note that the Select Committee on Deficit Reduction is charged with coming up with deficit reductions of $1.5 trillion over the next ten years -- that is, $150 billion per year.

Note well: $150 billion is 4% of fiscal year 2011 spending. 4%!!!???? All of this to get a 4% reduction in spending. Amazing.

Wednesday, August 10, 2011

Wisconsin Speaks

Recall how Republicans in Wisconsin dealt public unions a body blow, and the liberal world erupted in agony? Remember that the Wisconsin Democrats decamped to a neighboring state to try and avoid a vote on the union issue? Remember how in almost all press reporting of the changes to unions' collective bargaining powers the word "stripped" was always used, as here
Tuesday's recalls were largely seen as a test of Republican Gov. Scott Walker, who has drawn national attention since unveiling his controversial plan to strip nearly all collective bargaining rights from most public workers.

Well, yesterday six recall elections were held, with six Republican senators up for recall. The Dems had to win 3 of these to take back the Wisconsin senate. The Dems only won two of the six.

It cannot be said better than this, from the same Wisconsin State Journal article as above:
"The revolution has not occurred," said UW-Milwaukee political science professor Mordecai Lee, a former Democratic lawmaker. "The proletariat did not take over the streets."

Take notice, world.

Saturday, August 06, 2011

And Whither Europe?

Here is a very good article laying out the tough choice facing European policy makers: Dan O'Brien's article in the Irish Times, see here.

What are the choices? One, Europe could become more integrated, which would allow a central finance authority to backstop the debt of the close-to-default nations -- Greece, Ireland, Portugal -- as well as the larger countries of Italy and Spain which are also showing fault lines.

Or Europe could disintegrate. Another interesting idea, see here, is that Germany and a few related countries would be the ones to leave the Euro. Interesting -- leave Greece and others to wallow in the Euro, but at least they don't have to rewrite all contracts. It probably is true that it would be easier for the stronger set of countries to leave the Euro (back to the DM?!) than for the weaker.

The problem with increased integration, as I see it, is that increased economic integration requires more political integration. Look at what the Greeks and others did when they could borrow in euros, even when they ostensibly had to pay back the debt themselves. What would happen if they could borrow in euros and have the debt be every European country's responsibility? Talk about a major free-rider problem. But how can all the countries of Europe give up their rights to determine their own levels of spending and taxation? And to the Germans?

I guess the third choice is to try and ride out the storm. Batten down the hatches, tie the rudder, furl the sails and hope that the boat doesn't founder.

Federal Government Spending, 2008-2011

In light of S&P's downgrade of the US, it is interesting to take a look at Federal Government spending in the last three years 2008-2010 and this current year, 2011. Strictly speaking, the 2010 budget was the first one submitted by Obama; it was released in February 2009 after he took office. However, the American Recovery and Reinvestment Act was also passed in February 2009 and provided for economic stimulus spending of $800 billion over the next several years. It definitely impacted spending in 2009. Note also that while Obama has submitted a budget for every year of his presidency, Congress failed to pass a budget resolution for 2011 and will not do so for 2012 either.

Data are from GPO Access, see here.

Total outlays are as follows. Figures are in billions, so 2008 is $2.983 trillion.

2008 $2,983 billion
2009 $3,518
2010 $3,456
2011 (est.) $3,819

From 2008-2009, spending increased by 18%. Spending in 2011 will be, based on the estimate above, 28% above the level just three years earlier in 2008. The compound annual growth rate 2008-2011 is 8.5%. Over this same period, the general price level as measured by the CPI increased around 2% per year.

The broad based nature of the spending increase is striking. See the table I created showing expenditures by function. Figures here are in millions, not billions. The defense function in 2011 will account for $768 billion, or 20% of total Federal spending.

The figures for Energy are strange; in 2008 there was actually a $416 million surplus in a sub-energy account, Energy Supply, but by 2011 that account is negative $13.732 billion. But this is not the whole story in the energy area: energy conservation also goes from $409 million to $13.161 billion (I guess that was my metal roof that I got a tax credit for?)

I suppose that some of these increases are related to stimulus spending, but my fear and expectation is that any stimulus spending will end up being a permanent increase. In fact, projections for total spending in 2012 and 2103 from the same source above are $3,729 and $3,771 billion, hardly a significant decrease.

Is Federal government spending out of control? Indeed it has been. Is it any surprise that the voters sent Tea Party representatives to Congress to try and get some restraint? And are we surprised that our credit score took a hit?

The same source gives total tax revenues as well. In 2008, Federal receipts were $2,524 billion and in 2011 are estimated to be $2,174 billion, for a 14% reduction.

Friday, June 10, 2011

It was the sprouts!

Or was it? Does this statement make any sense?

“It was the sprouts,” Mr. Burger said.

He said investigators had examined 112 people, 19 of whom had been infected with E. coli during a group visit to a single restaurant, and had examined recipes for the food they had eaten, spoken to the chefs and even examined photographs they had taken of one another with their choices of food on the table.

The aim was “to discover exactly how each meal was prepared, which ingredients went into it,” Mr. Burger said. Customers who ate sprouts were found to be almost nine times as likely to be infected as other diners. It was this trail that led health inspectors to the organic farm where the sprouts originated.

See the NY Times for full story.

Wednesday, June 01, 2011

Of Nukes and Cucumbers

Germany has been impressing me lately with its lamentable public policy.

First, it announces the closure of several nuclear power plants and the future closure of all its nukes -- see here. This was on the basis of the Fukushima nuclear accident in Japan, caused by an earthquake and tsunami.

How many people were killed by the Fukushima accident? None. How many earthquakes and tsunamis has Germany recorded in the last century?

Meanwhile, Germany has 16 deaths from an e. Coli outbreak, with the deaths being violent and quick. Some officials in Germany quickly blamed cucumbers from Spain -- see here-- which was most likely a mistake. Spanish agriculture is naturally devastated, which is the last thing that country needs.

I wonder if Germany will now phase out cucumbers and raw vegetables generally. Was, kein mehr Gurken??

Monday, April 18, 2011

A Finnish Tea Party

Being half Finn, I have to chuckle at the success of the True Finns party. Timo Soini is the head of the True Finns, and he was the individual getting the most votes in last Sunday's election. The True Finns won 39 seats in the 200 member parliament, up from six prior to that. The Finnish cabinet had to resign due to the upheaval and it is not clear what a new government will look like.

The True Finns are opposed to Eurozone bailouts of member countries, and any bailout requires unanimity among member countries including Finland.

Mr. Soini had this to say:
“We won’t be dictating conditions for the rest of Europe but we will maintain the right for Finland to decide for itself on money matters,” he said. “Finnish cows must be milked in Finland and we shouldn’t send their milk for charity outside the borders of this country.”
Seems to me that the Tea Party movement has spread beyond the US!

US Debt on Negative Outlook!

The rating agency S&P today put out a negative outlook for the US debt rating, citing a deficit of 11% and no clear political consensus to do anything about it.

The White House had some interesting responses, according to CNBC. Among other things, the White House thought they should be given more time to get things in order before any ratings agencies take action.

Is this the same set of people who complained about slow ratings adjustments as Bear Stearns, AIG and Lehman were going down?

Ah, hypocrisy.

Friday, April 08, 2011

Thank you, Wisconsin!

What a nice boost to optimism on a Friday morning!

Late Thursday afternoon, a county clerk in a Republican district in Wisconsin discovered that a bunch of votes had not been recorded in the recent Wisconsin Supreme Court race, and the net effect gave the incumbent Republican David Prosser a big lead -- big enough even to avoid a state-funded recount. This story has not reached much of the new services yet; read about it here.

The counting is not over yet, so let's not break out the champagne, but this is certainly a nice reversal.

To recap events, Gov. Scott Walker's attempt to shift power away from public employee unions and help Wisconsin cut its government spending had spread to the election for Supreme Court justice. The WI Court had a 4-3 Republican majority and was in line to review the bill that the WI legislature just passed. If the Republican incumbent Prosser lost, the philosophical majority of the Court would not be sympathetic to the legislation. What should have been a noneventful, low turnout, low budget election in a liberal midwestern state turned out to be a national referendum on Republican attempts to cut government spending.

Initial results showed an extremely close race, but with the challenger Kloppenburg in the lead by a couple hundred votes.

I tried hard to rationalize the results, arguing that given the amount of liberal money and media attention, the fact that the race was even close in liberal Wisconsin should be a victory. But it was disappointing, and consistent with my bigger fear: that the public, even in the face of clearly unsustainable Federal and State deficit spending, would lose its backbone and not support drastic cuts in spending.

Now everything looks different. If Prosser wins, the conclusion is thus: Even in a liberal stronghold, after the left's best shots, including weeks of protests in the Madison capital that was covered nonstop in the media, and even given that what the Republicans were doing could easilly be cast in bad light ("stripping away" the right to negotiate by unions in the state that invented public unions) -- the public in the end continues to support the Republicans!

I think the Democrats in Washington who believe that the public will support them in their battle to keep the status quo in Federal government spending better reconsider their assumptions.

Saturday, March 05, 2011

Hospital and Ramsey Pricing: The Cost Shifting Issue

A discussion I had the other evening with a hospital executive centered around issues of hospital pricing, costs, Medicaid, and market power. My comments along the lines of, "Hospitals face inelastic demands and little effective competition, and they price accordingly" got the executive justifiably agitated. It was a lively evening.

Let me present a violently simplified picture of hospital pricing. I will assume we are dealing with a nonprofit hospital, which essentially faces a "balanced budget" constraint.

Suppose that the state government cuts its Medicaid reimbursements to this hospital in response to state budgetary problems. So instead of getting the list price of $10,000 for a gall bladder surgery, and for which the hospital used to receive $2500 from Medicaid, the hospital will now receive only $2,000. All reimbursements are cut in this fashion.

Faced with a balanced budget constraint, what is our hospital to do? Well, about 60% of the hospital's patients use private insurance, typically through an employer. This is a very inelastic demand. As a hospital increases its prices to private insurers, about the worst that can happen is that one or more of those insurers will cut the hospital out of their preferred supplier network. This is a relatively unlikely occurrence, but of course it depends on the current level of prices, the amount of the increase, and the competition among insurers.

In fact, what provoked my evening discussion was my work on this case in New Hampshire between Anthem BCBS and Exeter Hospital. Anthem threatened to cut Exeter Hospital out of its supplier network, claiming that Exeter had higher prices than other suppliers.

Such events do happen, but they do not present enough of a reason to reject my assumption of inelastic demand for private insurers' patients.

So what is our budget-constrained hospital to do, faced with cuts in government reimbursements. Raise prices to the private insurance market, of course! This is the infamous "cost-shifting" phenomenon in health care.

However, this turns out to be exactly what a central planner concerned with welfare maximization would do -- or, shall we say, it is exactly what the doctor would order!

There is a well-known idea in economics, Ramsey pricing. The classic problem is exactly our setup from above: How should an organization price its products or services, if it has to balance its budget (zero profit) and it wants to maximize welfare of society? The answer is to price in inverse relation to demand elasticity: the most elastic products get the lowest prices and the least elastic products get the highest prices (prices are actually relative to marginal cost of production). The sense of this is as follows. For maximum welfare, you want to create the least distortion in consumer behavior from what is optimal. What would be optimal would be for consumers to buy the product right up to where their value equalled marginal cost of production. That would take a price equal to marginal cost, and will not be feasible with the budget constraint. So we price higher to the inelastic demands, knowing that consumers will not cut back much on their purchases -- hence we will get a lot of revenue.
for the elastic demands, we keep prices closer to marginal cost, for if we raised prices there, we would get a large cutback in consumption which is inefficient.

So cost shifting to the private insurance market is just Ramsey pricing.

And in fact, take an even broader view of what is going on. We have something that the public has deemed to be good -- provision of medical care to the poor. But how to pay for this? We could use broad income taxes, but those are hard to raise, and in fact, cause inefficient distortion for production throughout the economy. So let's just force hospitals to take really low prices for services provided to the poor, knowing very well that the impact will be to raise health care prices to the privately insured. Turns out to be an efficient implicit tax scheme.

There is another angle I could pursue as well, which is a bit of what I was doing with the health care exec. This one paints nonprofit hospitals in not such a benign fashion. Faced with an inelastic demand curve, what else might we expect hospitals to do? Since they are nonprofit, they cannot make money for shareholders. But, they can certainly make life nice for anyone who works there. They can make sure that docs have all the resources they want, far beyond what a pure cost/benefit analysis would justify. They can, if faced with rising costs for whatever reason, take the easy road and raise prices rather than take the hard road of pushing back on the cost increases. If a typical for-profit business in a competitive marketplace faces rising costs, it cannot just raise prices to make it up. Hospitals often do not face that kind of competition, for a variety of reasons.

Saturday, February 26, 2011

Broccoli, Schmoccoli: A Mandate for Education

As an argument against the individual mandate to buy health insurance, one often hears something like this: "If the government can force us to buy health insurance, they could also force us to buy GM cars or even broccoli!"

Those are rather lame analogies -- unrealistic and not truly parallel to health insurance. While forcing us to buy cars has probably already crossed some civil servant's mind, the auto market just does not have the features of health insurance to make it even a remote candidate for an individual mandate-type rule. And broccoli...come on.

Here is a better one. Let's look forward to the year 2025, and read an editorial in the New York Times supporting the College Responsibility and Accountability Program.

What is more important than education, as a means for upward mobility in society? What better than education to break the generational cycle of ignorance, poverty, and dependence? The statistical evidence confirms that there is no better investment than investment in oneself, through a great post-secondary, college education. Education is truly a "special" economic commodity. It deserves special social and legal consideration.

Yet the United States is failing in providing a reasonably priced college education for all those who could benefit from it. In fact, the United States spends considerably more of its GDP on education, but its citizens consistently perform worse than other countries on any measures of intellectual ability, be it verbal or quantitative. The rate of increase in tuition at American universities exceeds by a large margin the general rate of inflation, and it has done so for decades.

The reasons for this high-cost, low-quality education market are numerous, and the forces of change work at glacial speed in the education industry. We still teach in the same way that Socrates did thousands of years ago. Some professors still use a blackboard! Technology advances abound, yet their rate of adoption is tortoise-like. Variations in costs and outcomes across colleges are huge: the total cost of an MBA at a private university exceeds $140,000, yet the graduates of elite schools can calculate an NPV no better than graduates of state universities with costs significantly less.

High costs force high prices, and many students and their parents are deep in educational loan debt.

And of course, the main problem is that we have a huge uneducated portion of the population -- those who are essentially closed out of the educational market. Without a college education, the chances of these young people making it into the middle class are very low. Their children will be in an even worse situation. While luck sometimes will lift a family out of ignorance and poverty, we cannot rely on hope alone. Something has to be done.

Exacerbating the situation is ruinous, death-spiral inducing competition in the education market. The best private and public colleges, rich with donations from wealthy alumni and blessed with grand reputations and brand names, attract only the very brightest students with the most potential. The less qualified (at least as measured by test scores and high school records) end up at colleges with...less qualified professors, fewer resources, and worse opportunities. The best companies go to the best colleges to recruit those students, leaving graduates of lesser schools in the ranks of the unemployed. As opportunities at lower tier schools deteriorate, prospective students wisely choose to not attend. This is the lemons market of education.

The College Responsibility and Accountability Program promises a remedy. In today's world, we have to recognize that a college education is a right. We must provide all young Americans an excellent college education. To do so, an individual mandate for everyone to purchase a four-year college education is both necessary and proper. Without an individual mandate, too many young people will choose to not attend college, and many universities will be unable to adequately provide the necessary resources for those foresighted students who do attend.

There are those who say that the US Constitution does not give Congress the power to regulate the education market, or to regulate an inaction on the part of its citizens. Yet the education market is clearly an interstate market, with students freely flowing across state lines, making application of the interstate commerce clause a trivial exercise. And as for the argument that Congress lacks the power to regulate an inaction: What more significant action can there be than the failure to attend college? To characterize the decision to not attend college as the lack of a decision or the lack of an action is to fail to see the other side of a coin. Deciding to not attend college is a decision to free ride off the rest of society; it is a decision to save one's own money now with the guarantee that the rest of society will protect one later on. The aggregate effect of a large portion of our young population to not attend college will prevent efficient functioning of an interstate higher education market; the regulation of these decisions is therefore a necessary and proper exercise of Congress' enumerated Constitutional power to regulate interstate commerce.

The College Responsibility and Accountability Program has many other provisions besides the individual mandate. There are provisions for employer-based tuition credits; enhanced subsidies and tax credits for lower income students; and the establishment of pilot programs to bend the value curve in education. There is an innovative new system of state-level educational exchanges to permit students to pick the college education that best fits their needs -- with choices of bronze, silver, gold and platinum packages. Pricing of the options is tightly regulated, with pricing differentials allowed only for the length of the program and the degree offered.

But the individual mandate to buy post-secondary education from a Federally-accredited institution is an absolutely necessary part of the overall package. If the pool of students remains at only 60% of the potential, as it is now, this country will never achieve the high quality educational industry that we need to be competitive. Requiring the purchase of a college education, with generous subsidies for those in need, is not only constitutionally permitted but absolutely necessary.

Saturday, February 19, 2011

More on Wisconsin

An excellent article by Tim Carney gets, I think, to the heart of the issue about "stripping away" collective bargaining rights over non-wage aspects of government union workers.

Carney cites these statistics:
Four of the top six Wisconsin contributors to the 2010 elections were labor unions, with the state's teachers union giving $119,342 and the Wisconsin chapter of the American Federation of State, County, and Municipal Employees spending $83,888. The teachers union gave 96 percent of its money to Democrats, while Wisconsin AFSCME gave Democrats every penny.

Government unions spent $573,868 on Wisconsin's 2010 elections -- almost all of it going to Democrats -- while government employees spent another half million, with most going to Democrats.
I trust the broad thrust of these numbers -- the public unions whose collective bargaining rights are being stripped overwhelmingly support the Democratic Party.

Now put yourself in a taxpayer's situation. Public officials bargain with the unions. The unions support them, financially. Taxpayers have to monitor the relationship to make sure it does not get too cozy. The more complicated the bargaining -- the more dimensions for politicians to reward a focused group of supporters -- the more difficult it is for taxpayers to monitor the relationship.

If we are concerned about the classic problem of politics - the ability of politicians to focus benefits on a small group while imposing a small cost on a large diffuse set of taxpayers - I think we could make a strong case for making any bargaining between politicians and public unions (or any other group that fits the above description) as clear and transparent as possible. Having multiple dimensions of a contract up for grabs makes the task of monitoring difficult. In principle, if the union were truly bargaining with the principal (rather than the agent of the principal) then it could extract all that is possible via just one instrument, the cash compensation.

A downside to the Wisconsin solution might be that politicians can set the benefits at any level they want. So if a new regime comes in, it would seem that they would have even more ability to give out largesse to the public employees.

One also does have to admit the view that this is simply reneging on an earlier contract. I am not overly sympathetic to that view, as even in the private sector the contributions to health care and pensions are constantly changing. The idea that the nonwage components of compensation are sacrosanct certainly went out the window, even in academia, with the last financial crisis.

Friday, February 18, 2011

Antitrust Inquiry for Apple?

Numerous reports on a potential FTC inquiry over Apple's policies on media subscriptions sold through its AppStore and billed through iTunes: see here for example.

What law is being violated here?

I have been waiting for Apple and publishers to get their collective act together and start offering some decent content, at a reasonable price, that I can access on my phone (preferred for now) or my iPad (birthday present coming up).

The complaint seems to be that Apple's 30% take is too large.

I ask again: What law is being broken here?

Fascinating Events in Wisconsin!

How many people really understand just what "collective bargaining rights" the Wisconsin governor's (Republican Scott Walker) proposal "strips away?" ("Strips away" seems to be the favorite media phrase for it.)

If you want to design a health care plan for public sector employees that makes economic sense (as measured by maximizing the total net value) might it be the case that you don't want to bargain over deductibles, copays, and network coverage while you are also bargaining over wages?

And doesn't bargaining over wages give sufficient leverage for the union? If other parameters of the job are set, the residual falls onto the wage, and that is what can be collectively bargained over.

Two final thoughts. In regard to the Democrat legislators leaving the State to prevent a vote from being taken, I find this pretty humorous:
The Wisconsin Constitution prohibits police from arresting legislators while they're in session.
What, are you kidding -- the WI constitution has that kind of detail? Quote is from this MSNBC story.

Second, this will be I think a watershed event. Let's see who blinks.

UPDATE: A reader has pointed out my naivety. His explanation of the constitutional prohibition against arresting legislators is sensible -- supposedly arresting your opponents was common practice in olden times. And I thought it was just another perk of elected office. Even our NH constitution provides for this: "No member of the house of representatives, or senate shall be arrested, or held to bail, on mesne process, during his going to, returning from, or attendance upon, the court."

Saturday, February 12, 2011

The Individual Mandate, The Coase Theorem, and the Takings Clause

There is nothing improper in the means that Obamacare deploys. Laws may properly regulate both actions and inactions...
If Congress can tax me, and can use my tax dollars to buy a health insurance policy for me, why can't it tell me to get a policy myself (or pay extra taxes)?
These are two quotes from Prof. Akhil Amar's opinion piece in the LA Times, "Constitutional Showdown."

Is there really no substantive, principle-based distinction between regulating action vs. inaction? Or similarly, is it really the same to tax me and use the proceeds to buy insurance for me vs. telling me to buy a policy or pay a tax (penalty)?

I think there are very large differences, substantive differences based on very important principles, that would seem to have constitutional implications as well.

The differences relate to a famous theorem in economics, the Coase Theorem, and they also relate to the Takings Clause of the Constitution ("nor shall private property be taken for public use, without just compensation").

The Coase Theorem states that the final allocation of property rights is independent of the initial allocation, in the absence of transaction costs and income effects. It is a remarkable yet simple theorem (the best kind). I like to illustrate it with pollution. If firms have the legal right to pollute the air, one might think that we will get a lot of pollution. Yet in such a world, those affected by pollution could pay the firms to stop. Whether the bargain works will depend on the cost of stopping the pollution versus the costs of the pollution. Another legal regime would give the citizens the right to clean air. In that case, we might think that we would get perfectly clean air, but of course that is wrong: firms may buy the right to pollute from the ciitzens. Indeed, they will do so if the cost of not polluting exceeds the cost of the pollution to the citizens, hence the Coase Theorem: pollution levels will be the same, no matter the initial allocation of legal/property rights.

Of course, in a world with transaction costs and income effects, the initial allocation of rights does matter. If citizens have to buy the right to clean air, they will likely buy less than the amount they would keep in a regime where they had the right to clean air to begin with -- the main reason being an income effect. Having to buy the right to clean air reduces citizens' wealth, and that in turn affects how much clean air they want. Transaction costs reinforce this: such costs make trading of rights difficult, so the initial allocation of rights is sticky.

If polluters have the initial right to pollute, it is reasonable to believe that we will have more pollution than if citizens initially have the right to clean air.

Of course, the Coase Theorem does not deny that the allocation of wealth is (strongly) affected by the initial allocation of rights. Citizens are better off if they start with the rights.

The individual mandate can be seen as an initial allocation of rights in favor of the government -- I don't have the right to decide whether to buy or not, the government can mandate it. The transaction costs of buying that right back are low, however, as all I need to do to buy my freedom of choice back is pay the penalty.

Without a mandate, citizens have the legal right to choose insurance or not, and if the government wanted them to buy insurance, they would have to pay them to do so (subsidize the insurance). This means that the government will have to raise tax revenue, and the transaction costs of that are large.

Following Coasian logic, I conclude that there will be less insurance purchased in a regime without the individual mandate. My main rationale is that the government will find it hard to raise sufficient tax revenue to get to the same outcome they would achieve with the individual mandate. This is indeed the heart of the mandate: it is a cheap (to the government) way to get everyone insured.

Now let's think about the takings clause in the Constitution. I have not seen anyone raise it in light of the individual mandate, yet it seems to me to hold some relevance. What is more "private property" than one's own wealth/money? Isn't the government essentially "taking" our money and using it for public purpose when they say that we must buy insurance?

The takings clause is very important in our society. It restricts how much public policy the government can implement, by giving citizens the initial right to their property. In Coasian terms, the takings clause forces the government to buy our property if they want to use it for public purpose. The takings clause forces government to go to taxpayers to finance policy, and that is a difficult task. Following my Coasian arguments above, the takings clause results in less public policy. Think of how much environmental policy could be implemented if only government could appropriate any private land, without just compensation, to hold in its natural state for conservation reasons!

Many commentators are arguing that the individual mandate is constitutional because it is a "necessary and proper" way to implement a constitutionally acceptable regulation of interstate (health care) commerce.

"Proper" in this sense has always been interpreted to mean not inconsistent with any part of the Constitution. In the words of Justice Marshall, "let it be within the scope of the constitution, and all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but consistent with the letter and spirit of the constitution, are constitutional."

The individual mandate seems to me to be inconsistent with the takings clause, at least in spirit. The takings clause makes the government bear the cost of its good intentions, in the sense that it must raise taxes on the citizenry. Doing good by taking private property is not allowed. I ask again: what is more private than my own wealth? Isn't it a "taking" for the government to tell me what I have to spend my money on? Doesn't the individual mandate represent the clearest taking of all?

PS. I could entertain the idea that just compensation is given, in that the individual receives insurance. But this is a hard story to tell, given the main reason for the mandate: to force a whole class of individuals into a transaction that a rational individual would not undertake.

Wednesday, February 02, 2011

The Stubborn Charade of the Individual Mandate

Why the stubborn insistence that the individual mandate is absolutely necessary to effective reform of our health care system? I am somewhat baffled.

The individual mandate is combined with a penalty for not buying government approved insurance, and with subsidies for buying such insurance, where the subsidy depends on your income level. By 2016 the penalty will be the greater of 2.5% of income or $695. Coupled with the penalty will be a subsidized insurance policy available. Let's say just for argument that the subsidized price of insurance for such a person would be $3,000. Thus, the purely economic calculus is that the net cost of insurance is $2,305 -- the difference between the cost of insurance and the penalty. Presumably if the insurance is worth more than $2,305, such a person would buy it and avoid the penalty.

Of course it is extremely simple to achieve the same outcome purely with a larger subsidy. Just make the cost of the insurance $2,305. The economics of the situation are virtually identical (virtually in that the person's situation is improved by $695 in the second scenario, whether they buy insurance or not). The key point is that the difference in wealth between having insurance vs. not having insurance is $2305 in both scenarios, i.e., the real price of insurance is the same.

So why do folks insist on the mandate/penalty combination instead of the free choice/subsidy combination?

Well, the larger subsidy costs more tax revenues. That probably would not have passed even the 2010 Congress. Essentially the mandate is a way to shift the cost of the program from general tax revenues to individuals who are forced to buy a product they don't want to.

There are other ways to achieve larger participation in the health insurance market as well, such as open enrollment periods at certain times only, and imposing a real cost for noncontinuous coverage.

Tuesday, February 01, 2011

Strike Two Against the Individual Mandate

A US District Court in Florida (R. Vinson, judge) issued summary judgment in support of 26 states who had brought suit against the Patient Protection and Affordable Care Act. The judge in the case considers two routes to a constitutional basis, flowing directly from the Commerce Clause and secondarily, resting on the Necessary and Proper Clause. As to the Commerce Clause, the telling summary is as follows:
Because I find both the “uniqueness” and “economic decision” arguments unpersuasive, I conclude that the individual mandate seeks to regulate economic inactivity, which is the very opposite of economic activity. And because activity is required under the Commerce Clause, the individual mandate exceeds Congress’ commerce power, as it is understood, defined, and applied in the existing Supreme Court case law.

As expected, the key point is that the Act requires action from an otherwise passive citizen, and this is not what the Commerce Clause permits, as defined in all previous Supreme Court decisions or by the Founders.

The Court secondarily turns to justifying the individual mandate on the basis of the Necessary and Proper Clause:
To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.

The argument here is a bit more convoluted in my humble opinion, but the judge's decision is clear:
The Necessary and Proper Clause cannot be utilized to “pass laws for the accomplishment of objects” that are not within Congress’ enumerated powers. As the previous analysis of the defendants’ Commerce Clause argument reveals, the individual mandate is neither within the letter nor the spirit of the Constitution. To uphold that provision via application of the Necessary and Proper Clause would authorize Congress to reach and regulate far beyond the currently established “outer limits” of the Commerce Clause and effectively remove all limits on federal power.

Again in my humble opinion, the Necessary and Proper Clause issue is an important one, and I do not find Judge Vinson convincing. It is a hard one -- if regulation of the insurance industry is the desired and constitutional end (justified via Commerce Clause) then isn't the individual mandate a necessary and proper means to that end?
It seems to me that one line of argument raised by Judge Vinson but not adequately argued is the difference between means and ends. I don't quite view the individual mandate as a means, but more of an end in itself. The language of the Clause is what I point to -- authorizing laws necessary for "carrying into execution." I can see the Constitutional basis of requirements for keeping records, or for creating criminal statutes for enforcing laws based on Constitutional powers. But is the individual mandate really a law necessary for "carrying into execution" the rest of the PPAC Act? Or is it an integral part of the Act itself, part of the ends that are being desired?

Another possible line of inquiry is that the individual mandate steps into territory that is normally reserved by the States -- a sure limiting factor to application of the Necessary and Proper Clause. The fact that Massachusetts already instituted a state level individual mandate would support this line of thinking.

Certain of Judge Vinson's words are being picked up by liberals, especially this part:
It is difficult to imagine that a nation which began, at least in part, as the result of opposition to a British mandate giving the East India Company a monopoly and imposing a nominal tax on all tea sold in America would have set out to create a government with the power to force people to buy tea in the first place. If Congress can penalize a passive individual for failing to engage in commerce, the enumeration of powers in the Constitution would have been in vain for it would be “difficult to perceive any limitation on federal power” [Lopez, supra, 514 U.S. at 564], and we would have a Constitution in name only. Surely this is not what the Founding Fathers could have intended.

Do you see Tea Party written all over that? Time for a Rorschach Test!

Beware Comma-Shaped Low Pressure Systems

One picture says it all; this will be a fun storm.

ps. that little bit of blue in the Northeast dumped 4-6 inches today, as the opening act.

Saturday, January 29, 2011

Dueling Financial Crisis Commission Reports

The Financial Crisis Inquiry Commission released its massive report today, with a majority group taking the bulk of the report and then two dissents (by Republican members).

Lots of interesting facts, conjectures, and conclusions.

One of the main issues argued between the majority and the dissent is the role of the GSEs, Fannie Mae and Freddie Mac.

The majority downplays their role, accepting that they played a part but not being a primary cause. I guess I would tend to agree with that, but not to the extent of the majority. The majority report notes that
Importantly, GSE mortgage securities essentially maintained their value
throughout the crisis and did not contribute to the significant financial firm losses
that were central to the financial crisis. (page xxvi)

Peter Wallison, in his dissent, argues that the GSEs played a larger role. His Table 1 on page 456 is definitely of interest, showing that the two main GSEs held 39% of the total subprime mortgage principal as of 2008 (definitions of the Table are not precise, but the Pinto document referenced does help).

In thinking about the role of the GSEs, who bought a lot of subprime originations and held them, I thought of mortgage backed securities as a big set of joint products. The GSEs wanted the AAA tranches, and sure enough, as the majority points out, those securities and the similar whole loans the GSEs bought did not have significant actual losses. None of the AAA securities did. But: suppose a set of consumers has a large increase in demand for beef. That will result in an increase supply of cow hides, pushing down the price of hides -- and someone is going to buy the hides. So the GSEs wanted a lot of AAA securities, with the byproduct being a lot of mezzanine B rated paper. That paper had to go somewhere, even at lower prices/higher yields. At high enough yields, it was bought, and it seemed quite profitable to the investment banks who held it (maybe after it was repackaged in CDOs).

Another analogy would be the war on drugs. Isn't it the buyer of drugs who are the real problem? They create the demand, and the suppliers just respond.

So without the GSEs we might not have had so much supply of lower rated MBSs.

I don't want to go so far as to make the GSEs a primary cause of the crisis, but they played a pretty significant part.