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.