This is going to be a short post, and just one to record where I'm coming from.
While the legal debate on health care revolves around interpretation of the commerce clause (which would be radically redefined if the high court strikes down the law), the economics of the health care market have roots that go back decades. My thinking on the topic grows out of three articles that have shaped my view of what's wrong with the health care market, and how it can be fixed. One of the articles is a piece of journalism that uses an anecdote to make a point specific to health care costs, while two are scholarly academic papers, one of which isn't explicitly about heath care, but which analyzes markets that have some characteristics that make the health care market prone to market failure (most notably, informational asymmetries).
The first is Atul Gawande's New Yorker piece from 2009, "The Cost Conundrum", detailing why runaway costs in a Texas town are substantially higher than those in towns with similar demographic profiles but different delivery methods for heath care.
The second is Nobel Prize winning economist (and Larry Summers's uncle) Kenneth Arrow's 1963 paper "Uncertainty and the Welfare Economics of Medical Care". It details just what it is that makes the health care market prone to failure, and why efficient delivery requires a regulatory approach. In other words, it systematically demolishes the case for an efficient market for health care services.
The last is by another Nobel Prize winner, George Akerlof. It's one of the most famous papers in economics, called "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism". It details, generally, how markets with asymmetrical information don't allocate resources efficiently due to confounding data that prevents the price mechanism from efficiently allocating resources. There's a section on the insurance market that is particularly applicable to health care.
All of these are, I think, crucial reading to understand the economics of the health care market. They've certainly been vital in shaping my understanding.
Wednesday, March 28, 2012
Tuesday, March 27, 2012
Adios ACA?
Today, the Supreme Court took on health care, and, by commentators' accounts, it wasn't pretty. The transcript is available here. Some snap thoughts:
1) The Solicitor General, Donald Verrilli, didn't do a very good job advocating the law today. Surprising, given that he's a perfectly good attorney. But the line of questioning from the usual suspects (Scalia, Alito) was predictable, and he didn't seem too well-prepared. A lot of the time, reading the transcript, I thought the left-leaning justices (Ginsburg and Breyer especially) did a better job of advocating the law than Verilli did.
2) Having said that, I'm somewhat surprised at how hostile some of the conservative justices were toward the law-- everyone and their mother knew Clarence Thomas wouldn't be voting to uphold the mandate (since he's stuck somewhere in the 19th century), but, going in, I thought Scalia (given some of his past votes in commerce clause cases) and Chief Justice Roberts were possibilities to vote to uphold. I thought a 7-2 decision with Thomas and Alito in dissent wasn't out of the question. Now, Scalia is an absolute no, and the swing justice, Anthony Kennedy, seemed pretty hostile, especially when Verrilli was arguing the case.
3) The decision certainly comes down to how Kennedy's feeling. And Kennedy is a very unpredictable vote-- he has long, philosophical debates in his head, then makes decisions based on the weather. OK, maybe that's a little unfair, but only a little. He didn't seem to internalize the arguments in the briefs, and looked like he wanted to find a "limiting principle" for restricting the government's power to regulate commerce. Never mind that the "limiting principle" was staring him straight in the face in the brief... Having said that, if Kennedy goes along, I think Chief Justice Roberts will too. Roberts absolutely wants to strike down the law, but if it gets upheld, I'm almost certain he'll join the majority so that he can write the majority opinion. Otherwise, I think it's a 5-4 decision with the predictable justices (Breyer, Ginsburg, Sotomayor, and Kagan) in dissent.
4) The limiting principle that Kennedy is looking for should be pretty straightforward. Health care is the only market that 1) everyone in the country besides Christian Scientists participates in, 2) has expenditures that are necessarily unpredictable, and 3) is provided to everyone as a matter of course. While it's true that there are certain markets with 100% participation, health care is the only one in which participation is mandatory. Take something like food-- everyone who is alive eats, but if I show up to the grocery store starving, the grocery store doesn't have to feed me. Contrast that with health care. Insurance or not, if I get hit by a bus tomorrow, I'll be taken to the hospital, I will be given emergency surgery to keep me alive, if my bones need surgery to be repaired, it will be done, and if I need pain medicine, I will get it. If I don't have insurance and don't have the funds to pay for my medical care... the hospital will swallow the costs. Except that it won't. It will raise prices for those who can afford to pay. In turn, insurers (who end up bearing those costs) will raise premiums. In other words, those who do have insurance will subsidize those who don't.
The government, then, can very clearly regulate market participation, even if it can't mandate participation. But, even if I don't consume any medical services for 10 years, I'm still a market participant because I am always a potential consumer of medical services, since I will be treated in hospitals regardless of whether I "choose" to be (or regardless of whether I can pay). That isn't the case in many other markets. The government can't, then, require that I buy a cell phone or that I buy a car or that I buy broccoli, as the conservative justices disingenuously suggested, because I'm not necessarily participating in those markets. Right now, I ride the subway everywhere. I am in no way in the auto market, even though I undoubtedly consume transportation services quite frequently. Similarly, I communicate with plenty of people, but I don't necessarily consume communication services. And, even though I'm in the food market multiple times a day, my participation is regular, it's predictable, and it's not necessary-- no one is providing me with food regardless of my ability to pay, and no one is required to feed me if I'm starving (though we tend to think it's a nice thing to do).
So distinguishing health care is easy, and the opinion should write itself. Now we'll see if Kennedy wakes up on the right side of the bed in June...
1) The Solicitor General, Donald Verrilli, didn't do a very good job advocating the law today. Surprising, given that he's a perfectly good attorney. But the line of questioning from the usual suspects (Scalia, Alito) was predictable, and he didn't seem too well-prepared. A lot of the time, reading the transcript, I thought the left-leaning justices (Ginsburg and Breyer especially) did a better job of advocating the law than Verilli did.
2) Having said that, I'm somewhat surprised at how hostile some of the conservative justices were toward the law-- everyone and their mother knew Clarence Thomas wouldn't be voting to uphold the mandate (since he's stuck somewhere in the 19th century), but, going in, I thought Scalia (given some of his past votes in commerce clause cases) and Chief Justice Roberts were possibilities to vote to uphold. I thought a 7-2 decision with Thomas and Alito in dissent wasn't out of the question. Now, Scalia is an absolute no, and the swing justice, Anthony Kennedy, seemed pretty hostile, especially when Verrilli was arguing the case.
3) The decision certainly comes down to how Kennedy's feeling. And Kennedy is a very unpredictable vote-- he has long, philosophical debates in his head, then makes decisions based on the weather. OK, maybe that's a little unfair, but only a little. He didn't seem to internalize the arguments in the briefs, and looked like he wanted to find a "limiting principle" for restricting the government's power to regulate commerce. Never mind that the "limiting principle" was staring him straight in the face in the brief... Having said that, if Kennedy goes along, I think Chief Justice Roberts will too. Roberts absolutely wants to strike down the law, but if it gets upheld, I'm almost certain he'll join the majority so that he can write the majority opinion. Otherwise, I think it's a 5-4 decision with the predictable justices (Breyer, Ginsburg, Sotomayor, and Kagan) in dissent.
4) The limiting principle that Kennedy is looking for should be pretty straightforward. Health care is the only market that 1) everyone in the country besides Christian Scientists participates in, 2) has expenditures that are necessarily unpredictable, and 3) is provided to everyone as a matter of course. While it's true that there are certain markets with 100% participation, health care is the only one in which participation is mandatory. Take something like food-- everyone who is alive eats, but if I show up to the grocery store starving, the grocery store doesn't have to feed me. Contrast that with health care. Insurance or not, if I get hit by a bus tomorrow, I'll be taken to the hospital, I will be given emergency surgery to keep me alive, if my bones need surgery to be repaired, it will be done, and if I need pain medicine, I will get it. If I don't have insurance and don't have the funds to pay for my medical care... the hospital will swallow the costs. Except that it won't. It will raise prices for those who can afford to pay. In turn, insurers (who end up bearing those costs) will raise premiums. In other words, those who do have insurance will subsidize those who don't.
The government, then, can very clearly regulate market participation, even if it can't mandate participation. But, even if I don't consume any medical services for 10 years, I'm still a market participant because I am always a potential consumer of medical services, since I will be treated in hospitals regardless of whether I "choose" to be (or regardless of whether I can pay). That isn't the case in many other markets. The government can't, then, require that I buy a cell phone or that I buy a car or that I buy broccoli, as the conservative justices disingenuously suggested, because I'm not necessarily participating in those markets. Right now, I ride the subway everywhere. I am in no way in the auto market, even though I undoubtedly consume transportation services quite frequently. Similarly, I communicate with plenty of people, but I don't necessarily consume communication services. And, even though I'm in the food market multiple times a day, my participation is regular, it's predictable, and it's not necessary-- no one is providing me with food regardless of my ability to pay, and no one is required to feed me if I'm starving (though we tend to think it's a nice thing to do).
So distinguishing health care is easy, and the opinion should write itself. Now we'll see if Kennedy wakes up on the right side of the bed in June...
Monday, March 26, 2012
Debating Health Care
Today, the Supreme Court heard the first day of arguments on the constitutionality of the health care reform bill Congress passed last year. It's kind of the Super Bowl for legal dorks-- the Court scheduled six hours of oral arguments over three days on four constitutional issues. Overruling the law would be a huge step-- it would overturn 70 years worth of Commerce Clause jurisprudence. It would, in a broad sense, probably the most substantial Commerce Clause decision since World War II.
The Court, rather than hearing the law as a whole, will actually hear four distinct issues related to the Affordable Care Act (ACA), two of which I actually think are pretty boring. Probably the least interesting issue before the Court will be argued Wednesday afternoon, and concerns a part of the law that mandates the expansion of Medicaid coverage. Medicaid operates as a federal-state partnership: the Feds provide some funds and instructions that the states are charged with carrying out. The expansion would have required states to pick up a share of the costs, and 28 Republican-led states sued, arguing that the expansion is "coercive" to the states. This is probably the least contentious of the issues, and the states will almost certainly lose-- the Feds have a well-recognized power to threaten to pull funds for states that don't comply with a federal program. Usually, this takes the form of the federal government pulling highway funds from states that lower the drinking age below 21 (which explains why there aren't any states that let you drink at 18). The Medicaid case would, in essence, pull federal Medicaid funds from states that don't participate in the expansion, which is a perfectly constitutional federal program-- states, after all, technically don't have to participate in Medicaid; they're free not to accept federal funds and pull out of the program. The real issue, of course, being that no one would be too excited about living in a state that doesn't provide Medicaid. But it would be shocking to see the Court overturn the Medicaid fix, so I doubt it will be an issue.
The second least interesting issue was argued this morning. It concerns the Anti-Injunction Act of 1867, which prevents constitutional challenges to taxes that have yet to go into effect. Since the penalty for failing to obtain health insurance doesn't kick in until 2014 (or maybe 2015; I don't remember exactly), deciding on this issue would give the Court a way out; it could say that it lacks the jurisdiction to hear the crux of the case until the penalty goes into effect. This one is kind of curious, since both the Administration and opponents of the law contend that it's not a tax. Over their objections, the Fourth Circuit decided that it was, so the Court appointed a private lawyer (Robert Long from the DC law firm Covington & Burling) to argue the opposing side. The early indication from the morning's argument seems to be that the Court will be rejecting the Anti-Injunction Act argument. Which I find a bit curious, since it seems to me that the easiest way for the Administration to win the argument on the individual mandate is to argue that the penalty for failing to obtain coverage is simply a tax (which is the crux of a brief filed by Columbia Law professors Gillian Metzger and Trevor Morrison and joined by a number of prominent Constitutional Law scholars) which can be waived by obtaining health care coverage. But that doesn't seem to be the route that the Administration is traking. We'll see if it's a mistake...
Now, the two most interesting issues are set to be argued tomorrow and Wednesday morning. The big one is the constitutionality of the individual mandate. Opponents of the ACA have built their argument on the contention that a mandate requiring individuals to buy a private product is an unprecedented infringement on personal liberty, and that upholding the mandate would give the federal government the power to regulate anything and everything under the Commerce Clause. It's entirely accurate to characterize this as a fringe position. Going back to the Court's decision in Wickard v. Filburn (1942), the Commerce Clause has covered essentially all economic activity reasonably related to a national market. In that case, the Court decided that a law regulating wheat production could enjoin a farmer from exceeding his quota even if he used the wheat for consumption on his own farm, the perfectly reasonable rationale being that, even if the wheat was not sold directly into the market, growing wheat for personal consumption directly impacted the national market by displacing wheat that would have been bought in that market. Since then, the Court has pushed back on Wickard only modestly, holding most significantly in United States v. Lopez (1995) that a statute barring people from carrying guns in school zones was not sufficiently related to interstate commerce to be covered by the Commerce Clause.
The health care case is as close to airtight as there is. While the law, on its face, requires people to buy a private product, the relation to interstate commerce is very clear and straightforward. To start with, everyone in the country participates in the health care market all the time, whether they are consuming medical services at a particular moment or not. Whether I am insured or not, and whether I have the means to pay for health care or not, if I were to be hit by a car tomorrow, I would be transported directly to the hospital, where I would receive medical treatment. The question would not be whether I am in the health care market, but who would pay for my health care services. If I had insurance, it would be my insurer. If I didn't, my health care provider would eat the cost. But not really, because the story doesn't stop there. If uninsured people are going to keep being given treatment (and that's an unavoidable proposition, unless you think doctors should ignore the Hippocratic Oath and start digging through people's wallets at the hospital before giving them life-saving treatment), health care providers will continue to do what they're already doing-- they will raise the rates they charge those who can pay to compensate for those who don't. Since we overwhelmingly pay for medical care through insurance (really, it's the only way to do it; for economic reasons, medical care markets really only function when insurers pay), insurance companies will raise premiums, since providers will charge them more for procedures. Consequently, at the end of the day, those who do buy insurance end up paying for those who don't.
Failing to buy health insurance, then, is a direct economic act. The position advanced by opponents is that we all participate in the food market, so the government can require us to buy broccoli. But that's a complete non-sequitur. Yes, we all end up getting food, but, for one thing, food providers don't have to give us food if we need it-- we might think it's a good thing for the grocery store to feed me for free if I'm starving and can't afford food, but the law doesn't recognize that as an imperative. And food is not a market with adverse selection issues that has to be paid for through insurance; I can't put off eating because I figure the food provider will feed me anyway, and food isn't something whose costs will bankrupt me-- an emergency surgery after a car wreck that insurance doesn't cover can easily bankrupt someone; a Big Mac at McDonald's most definitely can't. So, in a particular sense, health care is a unique market in that people both constantly participate in it, and can really only pay for it through an insurance rather than out-of-pocket mechanism. All of which makes it pretty plainly within Congress's powers under the Commerce Clause.
The last issue, which will be argued Wednesday morning, concerns the ACA's severability-- that is, if the individual mandate were found to be unconstitutional, the Court would have to decide whether it can be "severed", or detached, from the rest of the law. My view is that it's, plainly, not severable. ACA rests on a three-legged stool: a requirement that insurers not be able to refuse coverage to those with so-called pre-existing conditions, subsidies for people who can't afford insurance to get it, and a requirement that everyone purchase coverage or pay a penalty. The reason it's a stool is that all three features are necessary for the law to function. If you require insurers to cover everyone and provide subsidies to those that can't afford it, but get rid of the mandate for individuals to purchase insurance, the predictable result will be that no one will actually get health insurance until they need coverage-- after all, if the government is picking up the tab for their purchase of insurance, and companies can't turn them down for coverage, there's no reason to pay premiums until they actually need coverage. As a result, costs will skyrocket, as insurers will have to charge a fortune just to be able to cover costs. The result would be an absurdity. You similarly need subsidies, since you can't squeeze water from a stone-- requiring someone with no income (or very little income) to get insurance is an obvious absurdity. And, if insurers can reject applicants on the basis of pre-existing conditions, the individual mandate becomes essentially meaningless-- those people's premiums will be so high that very few will be able to afford them, which means subsidies for those people will have to be sky-high.
But the Court shouldn't even have to get to severability, because the law is so clearly constitutional. Frankly, even though this is the most reactionary Supreme Court we've had since the 1930s, this shouldn't even be a close decision-- Clarence Thomas will certainly vote to invalidate the law (but then, Clarence Thomas is an army of one-- a weirdo whose views are as far outside the mainstream of the legal profession that no one really subscribes to them besides Thomas himself), and Antonin Scalia might as well (though I have my doubts). But even far-right justices like John Roberts and Samuel Alito will have a hard time finding that the law is unconstitutional. I think it'll be a 6-3 upholding the individual mandate.
The Court, rather than hearing the law as a whole, will actually hear four distinct issues related to the Affordable Care Act (ACA), two of which I actually think are pretty boring. Probably the least interesting issue before the Court will be argued Wednesday afternoon, and concerns a part of the law that mandates the expansion of Medicaid coverage. Medicaid operates as a federal-state partnership: the Feds provide some funds and instructions that the states are charged with carrying out. The expansion would have required states to pick up a share of the costs, and 28 Republican-led states sued, arguing that the expansion is "coercive" to the states. This is probably the least contentious of the issues, and the states will almost certainly lose-- the Feds have a well-recognized power to threaten to pull funds for states that don't comply with a federal program. Usually, this takes the form of the federal government pulling highway funds from states that lower the drinking age below 21 (which explains why there aren't any states that let you drink at 18). The Medicaid case would, in essence, pull federal Medicaid funds from states that don't participate in the expansion, which is a perfectly constitutional federal program-- states, after all, technically don't have to participate in Medicaid; they're free not to accept federal funds and pull out of the program. The real issue, of course, being that no one would be too excited about living in a state that doesn't provide Medicaid. But it would be shocking to see the Court overturn the Medicaid fix, so I doubt it will be an issue.
The second least interesting issue was argued this morning. It concerns the Anti-Injunction Act of 1867, which prevents constitutional challenges to taxes that have yet to go into effect. Since the penalty for failing to obtain health insurance doesn't kick in until 2014 (or maybe 2015; I don't remember exactly), deciding on this issue would give the Court a way out; it could say that it lacks the jurisdiction to hear the crux of the case until the penalty goes into effect. This one is kind of curious, since both the Administration and opponents of the law contend that it's not a tax. Over their objections, the Fourth Circuit decided that it was, so the Court appointed a private lawyer (Robert Long from the DC law firm Covington & Burling) to argue the opposing side. The early indication from the morning's argument seems to be that the Court will be rejecting the Anti-Injunction Act argument. Which I find a bit curious, since it seems to me that the easiest way for the Administration to win the argument on the individual mandate is to argue that the penalty for failing to obtain coverage is simply a tax (which is the crux of a brief filed by Columbia Law professors Gillian Metzger and Trevor Morrison and joined by a number of prominent Constitutional Law scholars) which can be waived by obtaining health care coverage. But that doesn't seem to be the route that the Administration is traking. We'll see if it's a mistake...
Now, the two most interesting issues are set to be argued tomorrow and Wednesday morning. The big one is the constitutionality of the individual mandate. Opponents of the ACA have built their argument on the contention that a mandate requiring individuals to buy a private product is an unprecedented infringement on personal liberty, and that upholding the mandate would give the federal government the power to regulate anything and everything under the Commerce Clause. It's entirely accurate to characterize this as a fringe position. Going back to the Court's decision in Wickard v. Filburn (1942), the Commerce Clause has covered essentially all economic activity reasonably related to a national market. In that case, the Court decided that a law regulating wheat production could enjoin a farmer from exceeding his quota even if he used the wheat for consumption on his own farm, the perfectly reasonable rationale being that, even if the wheat was not sold directly into the market, growing wheat for personal consumption directly impacted the national market by displacing wheat that would have been bought in that market. Since then, the Court has pushed back on Wickard only modestly, holding most significantly in United States v. Lopez (1995) that a statute barring people from carrying guns in school zones was not sufficiently related to interstate commerce to be covered by the Commerce Clause.
The health care case is as close to airtight as there is. While the law, on its face, requires people to buy a private product, the relation to interstate commerce is very clear and straightforward. To start with, everyone in the country participates in the health care market all the time, whether they are consuming medical services at a particular moment or not. Whether I am insured or not, and whether I have the means to pay for health care or not, if I were to be hit by a car tomorrow, I would be transported directly to the hospital, where I would receive medical treatment. The question would not be whether I am in the health care market, but who would pay for my health care services. If I had insurance, it would be my insurer. If I didn't, my health care provider would eat the cost. But not really, because the story doesn't stop there. If uninsured people are going to keep being given treatment (and that's an unavoidable proposition, unless you think doctors should ignore the Hippocratic Oath and start digging through people's wallets at the hospital before giving them life-saving treatment), health care providers will continue to do what they're already doing-- they will raise the rates they charge those who can pay to compensate for those who don't. Since we overwhelmingly pay for medical care through insurance (really, it's the only way to do it; for economic reasons, medical care markets really only function when insurers pay), insurance companies will raise premiums, since providers will charge them more for procedures. Consequently, at the end of the day, those who do buy insurance end up paying for those who don't.
Failing to buy health insurance, then, is a direct economic act. The position advanced by opponents is that we all participate in the food market, so the government can require us to buy broccoli. But that's a complete non-sequitur. Yes, we all end up getting food, but, for one thing, food providers don't have to give us food if we need it-- we might think it's a good thing for the grocery store to feed me for free if I'm starving and can't afford food, but the law doesn't recognize that as an imperative. And food is not a market with adverse selection issues that has to be paid for through insurance; I can't put off eating because I figure the food provider will feed me anyway, and food isn't something whose costs will bankrupt me-- an emergency surgery after a car wreck that insurance doesn't cover can easily bankrupt someone; a Big Mac at McDonald's most definitely can't. So, in a particular sense, health care is a unique market in that people both constantly participate in it, and can really only pay for it through an insurance rather than out-of-pocket mechanism. All of which makes it pretty plainly within Congress's powers under the Commerce Clause.
The last issue, which will be argued Wednesday morning, concerns the ACA's severability-- that is, if the individual mandate were found to be unconstitutional, the Court would have to decide whether it can be "severed", or detached, from the rest of the law. My view is that it's, plainly, not severable. ACA rests on a three-legged stool: a requirement that insurers not be able to refuse coverage to those with so-called pre-existing conditions, subsidies for people who can't afford insurance to get it, and a requirement that everyone purchase coverage or pay a penalty. The reason it's a stool is that all three features are necessary for the law to function. If you require insurers to cover everyone and provide subsidies to those that can't afford it, but get rid of the mandate for individuals to purchase insurance, the predictable result will be that no one will actually get health insurance until they need coverage-- after all, if the government is picking up the tab for their purchase of insurance, and companies can't turn them down for coverage, there's no reason to pay premiums until they actually need coverage. As a result, costs will skyrocket, as insurers will have to charge a fortune just to be able to cover costs. The result would be an absurdity. You similarly need subsidies, since you can't squeeze water from a stone-- requiring someone with no income (or very little income) to get insurance is an obvious absurdity. And, if insurers can reject applicants on the basis of pre-existing conditions, the individual mandate becomes essentially meaningless-- those people's premiums will be so high that very few will be able to afford them, which means subsidies for those people will have to be sky-high.
But the Court shouldn't even have to get to severability, because the law is so clearly constitutional. Frankly, even though this is the most reactionary Supreme Court we've had since the 1930s, this shouldn't even be a close decision-- Clarence Thomas will certainly vote to invalidate the law (but then, Clarence Thomas is an army of one-- a weirdo whose views are as far outside the mainstream of the legal profession that no one really subscribes to them besides Thomas himself), and Antonin Scalia might as well (though I have my doubts). But even far-right justices like John Roberts and Samuel Alito will have a hard time finding that the law is unconstitutional. I think it'll be a 6-3 upholding the individual mandate.
Goldman Sachs, Obama, and Hedge Funds
This post will have two somewhat unrelated topics; both are pretty short, but I find both pretty interesting.
Goldman and Greg Smith
The past few weeks, the biggest story in the financial press has concerned Goldman Sachs executive director Greg Smith's resignation letter, printed in the New York Times op-ed page. Smith was an executive director in the London office who decided he was bolting, and would try to take a shot on his way out the door. The reaction was predictable-- the left and populist right jumped on it as further proof that big banks like Goldman put the interests of their clients ("muppets") behind the firm's bottom line. The right saw it as another disgruntled employee kicking a bank when it was down.
The truth is, both are probably right to a substantial extent. I don't doubt that the facts in Smith's op-ed are all, or at least mostly, true. I don't doubt that there are managing directors who call their clients muppets, that the firm prioritizes its bottom line over the interests of its clients, and is ready and willing to throw them under the bus if their interests aren't perfectly aligned with Goldman's. But Smith's claim that the Goldman he joined in 2000 is unrecognizable in 2012 is deeply disingenuous. He claims that its CEO Lloyd Blankfein and COO Gary Cohn who have "ruined" the firm that he joined. That seems to be a patently absurd charge-- five years ago, Goldman was putting together transactions like the infamous Abacus deal that involved dumping junk assets on less aware (though technically not "unsophisticated") parties. Instead of bolting then, Smith waited another 5 years. But Goldman putting its own interests ahead of its clients is hardly a new development-- in the 1970s, they were dumping bonds of the bankrupt Penn Central railroad on their unwitting clients. In the 1920s, they launched the Goldman Sachs Trading Corporation, a closed-end fund that was, in essence, a Ponzi scheme. Again, Goldman's clients lost. So Goldman hardly transformed from paragon of Wall Street to vampire squid in a 6-year span. Or even a 12-year span. To a certain extent, they've always been that way.
None of which is to say that Goldman is unique-- given the opportunity, Morgan Stanley would do the same thing in an instant. If Lehman and Bear Stearns were still around, so would they. Goldman gets the bum rap because they're better at it than their rivals-- in 2004, Goldman was loading up on mortgage-related assets, neck and neck with Merrill, Bear, Lehman and Citi. But in 2006 and 2007, when those rivals were accelerating their exposure, Goldman was dumping its holdings. And when the bubble burst, Goldman came out ahead while its rivals fell into what was probably insolvency. In cutting its exposure, Goldman threw its clients under the bus for its own benefit. But if its rivals had had the same insight Goldman had, they would have done the same thing. And Goldman's clients thought that they were getting a good deal. So the story isn't as black and white as some would claim.
And it's probably true that there have been times when Goldman has been a good fiduciary-- in the 1950s, when Sidney Weinberg was at the helm, Goldman was Ford's banker, managing the company's IPO and taking, by today's standards, minuscule fees in the process. But those periods were probably the exception rather than the rule.
My instinct about Smith, though, is that he was ready to stay the good soldier until he fell out of favor-- contrary to the press's account, he was hardly a bigwig. At Goldman, an "executive director" in London is the equivalent of a vice president in the US. At the firm, that's a middle management position-- the equivalent of a fourth- or fifth-year associate at a law firm. My guess is Smith was passed over for a promotion and/or fell into disfavor. He felt aggrieved, decided Blankfein and Cohn were at fault, and decided he'd throw them under the bus on his way out. It may well be true that there was some culture change from when Smith came in (with Hank Paulson at the helm) to the time he left, just because Paulson was a dealmaker, while Blankfein was a commodities salesman. But I'm also certain that the Goldman Smith entered in 2000 is the same Goldman, for all intents and purposes, that he left in 2000. What changed wasn't the firm-- it was Smith's relationship to it.
Obama and the Hedge Funds
Even more interesting, to me, was an article in the latest New Republic by Alec MacGillis about the frayed relationship between the hedge fund industry and President Obama. There's been a pretty remarkable move of managers like Clifford Asness (AQR Capital) and Ken Griffin (Citadel) into the Republican column. What MacGillis underlined was that it hasn't necessarily been the polices of the Obama adminstration that have driven the managers away-- it's been rhetoric. The administration has pushed somewhat for elimination of preferred tax treatment for capital gains (though hedge funds are typically in and out of trades so quickly that they don't get the tax benefits anyway), and has used some slightly cool rhetoric in describing hedge fund managers ("fat cats" is about as insulting as it got), but it hasn't done much that would keep hedge fund managers from making hundreds of millions, provided they make the right bets.
What strikes me as the source of their anger, though, is these managers' incredibly thin skin. Because, as much as they may not think so, these "masters of the universe" seem to want acceptance more than just about anyone else. Their complaints amount, in essence, to Obama and Larry Summers not taking the time to read their memos, calling them fat cats, and refusing to coddle them. It's kind of ridiculous that they've essentially decided to "take their ball and go home" because the President looked at them funny.
Goldman and Greg Smith
The past few weeks, the biggest story in the financial press has concerned Goldman Sachs executive director Greg Smith's resignation letter, printed in the New York Times op-ed page. Smith was an executive director in the London office who decided he was bolting, and would try to take a shot on his way out the door. The reaction was predictable-- the left and populist right jumped on it as further proof that big banks like Goldman put the interests of their clients ("muppets") behind the firm's bottom line. The right saw it as another disgruntled employee kicking a bank when it was down.
The truth is, both are probably right to a substantial extent. I don't doubt that the facts in Smith's op-ed are all, or at least mostly, true. I don't doubt that there are managing directors who call their clients muppets, that the firm prioritizes its bottom line over the interests of its clients, and is ready and willing to throw them under the bus if their interests aren't perfectly aligned with Goldman's. But Smith's claim that the Goldman he joined in 2000 is unrecognizable in 2012 is deeply disingenuous. He claims that its CEO Lloyd Blankfein and COO Gary Cohn who have "ruined" the firm that he joined. That seems to be a patently absurd charge-- five years ago, Goldman was putting together transactions like the infamous Abacus deal that involved dumping junk assets on less aware (though technically not "unsophisticated") parties. Instead of bolting then, Smith waited another 5 years. But Goldman putting its own interests ahead of its clients is hardly a new development-- in the 1970s, they were dumping bonds of the bankrupt Penn Central railroad on their unwitting clients. In the 1920s, they launched the Goldman Sachs Trading Corporation, a closed-end fund that was, in essence, a Ponzi scheme. Again, Goldman's clients lost. So Goldman hardly transformed from paragon of Wall Street to vampire squid in a 6-year span. Or even a 12-year span. To a certain extent, they've always been that way.
None of which is to say that Goldman is unique-- given the opportunity, Morgan Stanley would do the same thing in an instant. If Lehman and Bear Stearns were still around, so would they. Goldman gets the bum rap because they're better at it than their rivals-- in 2004, Goldman was loading up on mortgage-related assets, neck and neck with Merrill, Bear, Lehman and Citi. But in 2006 and 2007, when those rivals were accelerating their exposure, Goldman was dumping its holdings. And when the bubble burst, Goldman came out ahead while its rivals fell into what was probably insolvency. In cutting its exposure, Goldman threw its clients under the bus for its own benefit. But if its rivals had had the same insight Goldman had, they would have done the same thing. And Goldman's clients thought that they were getting a good deal. So the story isn't as black and white as some would claim.
And it's probably true that there have been times when Goldman has been a good fiduciary-- in the 1950s, when Sidney Weinberg was at the helm, Goldman was Ford's banker, managing the company's IPO and taking, by today's standards, minuscule fees in the process. But those periods were probably the exception rather than the rule.
My instinct about Smith, though, is that he was ready to stay the good soldier until he fell out of favor-- contrary to the press's account, he was hardly a bigwig. At Goldman, an "executive director" in London is the equivalent of a vice president in the US. At the firm, that's a middle management position-- the equivalent of a fourth- or fifth-year associate at a law firm. My guess is Smith was passed over for a promotion and/or fell into disfavor. He felt aggrieved, decided Blankfein and Cohn were at fault, and decided he'd throw them under the bus on his way out. It may well be true that there was some culture change from when Smith came in (with Hank Paulson at the helm) to the time he left, just because Paulson was a dealmaker, while Blankfein was a commodities salesman. But I'm also certain that the Goldman Smith entered in 2000 is the same Goldman, for all intents and purposes, that he left in 2000. What changed wasn't the firm-- it was Smith's relationship to it.
Obama and the Hedge Funds
Even more interesting, to me, was an article in the latest New Republic by Alec MacGillis about the frayed relationship between the hedge fund industry and President Obama. There's been a pretty remarkable move of managers like Clifford Asness (AQR Capital) and Ken Griffin (Citadel) into the Republican column. What MacGillis underlined was that it hasn't necessarily been the polices of the Obama adminstration that have driven the managers away-- it's been rhetoric. The administration has pushed somewhat for elimination of preferred tax treatment for capital gains (though hedge funds are typically in and out of trades so quickly that they don't get the tax benefits anyway), and has used some slightly cool rhetoric in describing hedge fund managers ("fat cats" is about as insulting as it got), but it hasn't done much that would keep hedge fund managers from making hundreds of millions, provided they make the right bets.
What strikes me as the source of their anger, though, is these managers' incredibly thin skin. Because, as much as they may not think so, these "masters of the universe" seem to want acceptance more than just about anyone else. Their complaints amount, in essence, to Obama and Larry Summers not taking the time to read their memos, calling them fat cats, and refusing to coddle them. It's kind of ridiculous that they've essentially decided to "take their ball and go home" because the President looked at them funny.
Sunday, March 25, 2012
The curiosity of Cochrane
As both of my regular readers (Hi Mom!) might have noticed , I tend to come down on a particular side of most policy debates. In part, that has to do with the way I see the world-- I'm instinctively skeptical of government intervention in the economy, but I'm not viscerally opposed to it, and I tend to think that selective, smart government intervention can play a role in improving social outcomes. But I like to think that I'm pretty open-minded: I like to read things from people who I'm likely to disagree with, just so that I can feel like I have a good sense of what the debate is, and can justify why I come down on a particular side. A lot of times, those bloggers make interesting, innovative arguments, and I learn from them (Bentley's Scott Sumner and George Mason's Tyler Cowen are two of my favorites in that category). Other times, the blogs, despite the author's academic credentials, are either thin on substance (Harvard's Greg Mankiw is the primary example; he mostly posts links, and when he does make arguments, they're... curious and frequently at odds with his academic research) or spend their time playing politics (Stanford's John Taylor is guilty of this one more than anyone else; he makes claims that are directly at odds with his own statements from a few years back, for what seems to be no better reason than that his political party has shifted to the right and his research bolsters Democratic positions).
But the most curious case is the University of Chicago's John Cochrane. Cochrane spends so much time twisting himself in circles to get to particular outcomes that he ends up making arguments that are either blatant contradictions or have logical implications that are entirely absurd. Which leads to bizarre posts like this one. The best thing you can say for Cochrane is that he doesn't close his eyes, plug his ears, and yell that up is down-- the austerity experiment in Greece is a proven failure, as austerity (predictably) reduces output, which depresses tax receipts, which means that hiking taxes and cutting spending isn't just bad for growth-- it's also bad for the budget. Cochrane acknowledges all this. But then he dismisses the notion, advanced in Brad DeLong and Larry Summers's recent paper, that, when the economy is in a liquidity trap (as the US presently is), expansionary fiscal policy can actually pay for itself (by stimulating growth enough to actually improve the fiscal situation. He then goes on to talk about structural reform, but that's neither here nor there.
What Cochrane's position implies is that, while we know austerity doesn't help the budget problems in Europe, it seems he thinks stimulus doesn't either. But we know that changes in fiscal policy have to have some effect on the budget picture; the deficit isn't going to stay at a constant level regardless of what changes government makes to taxes or spending (that's a pretty self-evident argument). The implication, then, is that, in purely budgetary terms, government spending, both in Greece and everywhere else in the world, is OPTIMAL. In other words, he's either making the patently absurd claim that it doesn't matter what kinds of taxing and spending decisions government makes, or the even more patently absurd claim that every government in the world has gotten its taxing and spending decision exactly right, and no changes can be made to improve that outcome.
And it's posts like these that convince me that I have the opinions I do for a reason...
But the most curious case is the University of Chicago's John Cochrane. Cochrane spends so much time twisting himself in circles to get to particular outcomes that he ends up making arguments that are either blatant contradictions or have logical implications that are entirely absurd. Which leads to bizarre posts like this one. The best thing you can say for Cochrane is that he doesn't close his eyes, plug his ears, and yell that up is down-- the austerity experiment in Greece is a proven failure, as austerity (predictably) reduces output, which depresses tax receipts, which means that hiking taxes and cutting spending isn't just bad for growth-- it's also bad for the budget. Cochrane acknowledges all this. But then he dismisses the notion, advanced in Brad DeLong and Larry Summers's recent paper, that, when the economy is in a liquidity trap (as the US presently is), expansionary fiscal policy can actually pay for itself (by stimulating growth enough to actually improve the fiscal situation. He then goes on to talk about structural reform, but that's neither here nor there.
What Cochrane's position implies is that, while we know austerity doesn't help the budget problems in Europe, it seems he thinks stimulus doesn't either. But we know that changes in fiscal policy have to have some effect on the budget picture; the deficit isn't going to stay at a constant level regardless of what changes government makes to taxes or spending (that's a pretty self-evident argument). The implication, then, is that, in purely budgetary terms, government spending, both in Greece and everywhere else in the world, is OPTIMAL. In other words, he's either making the patently absurd claim that it doesn't matter what kinds of taxing and spending decisions government makes, or the even more patently absurd claim that every government in the world has gotten its taxing and spending decision exactly right, and no changes can be made to improve that outcome.
And it's posts like these that convince me that I have the opinions I do for a reason...
Wednesday, March 21, 2012
Robert Samuelson is a terrible journalist
Robert Samuelson of the Washington Post is my least favorite kind of pundit. Ideological hacks come in a number of different flavors. Some, like George Will and Charles Krauthammer, are unabashedly ideological-- they play for Team Republican and they know it. Others, like Rush Limbaugh and Glenn Beck, are rodeo clowns-- they say things to get a rise out of people, and their fans claim that whatever racist, sexist, or otherwise insulting trope they're trotting out is what everyone is thinking, and the brave Limbaugh is the only one saying it.
But Robert Samuelson is a different breed-- he's the "reasonable" ideologue. He likes to talk about being committed to "fair", and "unbiased" reporting, and faults others for "twisting" the rhetoric or facts to match their political preferences. He accuses the "liberal" mainstream media of doing it most, this time in a column about Medicare reform. Here's the crux of his claim (not in order, but it gets at the key arguments:
But many Democrats despise vouchers, which (they say) would “privatize Medicare” and “end Medicare.” The language is self-serving demagoguery intended to terrify seniors. Unfortunately, some in the media sometimes sloppily adopt these attack phrases as acceptable descriptions.
...
These descriptions aren’t acceptable, because they don’t reflect reality. The fact that some voucher advocates also use “privatize” doesn’t change matters. Consider.
Vouchers would not “end Medicare.” Fundamentally, Medicare promises health-care coverage to most Americans 65 and over. We call this an “entitlement.” The entitlement wouldn’t end. The federal government would still pay for coverage. In this basic sense, Medicare vouchers don’t threaten the program.
...
But similar changes can occur — and already have — under the present system. If the government cuts reimbursement rates for some services, those services may become less available. In 1997, that’s precisely what happened with home health care services. The American Medical Association has repeatedly warned that if Medicare reimbursement rates are held down, fewer doctors will see Medicare patients. Similarly, premiums for wealthier recipients have already been raised for doctors’ services and drug coverage.
Vouchers wouldn’t “privatize Medicare.”The reason is simple: Medicare has always been “privatized.” Most doctors who receive Medicare reimbursement aren’t government doctors. Similarly, most hospitals are private, whether for-profit or not-for-profit. Drug and medical-device companies are private. Under the Medicare Advantage program, insurance companies already offer competing plans for about 25 percent of recipients. They offer “Medigap” insurance (plans that cover what Medicare doesn’t) to another 18 percent of recipients.
Samuelson's claim is that, because a voucher program would involve some government support to help seniors buy health insurance, that doing so wouldn't "end" Medicare. He suggests that talking about "privatizing" Medicare is misleading because Medicare is already privatized, in the sense that Medicare doesn't employ medical practitioners. His first claim is enormously disingenuous. His second is either patently dishonest, or reflects deep stupidity.
To begin with, it helps to understand what Medicare is. Simply put, it's a government-run health insurance provider for senior citizens. That means that, once you're eligible, government provides you with health insurance that allows you to have your treatment paid for by Medicare. One simple way to think about it is that's Blue Cross/Blue Shield for the elderly. Now, it doesn't have to cover everything-- you can decide that Medicare should cover only certain procedures, or should have a certain deductible, or something along those lines. In practice, those kinds of changes happen all the time (and Samuelson describes them, dishonestly, as similar to a voucher scheme). Those kinds of changes, if draconian enough, could be fairly said to gut Medicare. But so long as a government-run insurance plan remained in place, it would still be Medicare.
A voucher scheme, as contemplated by the right, gets rid of that health insurance program. Instead, it provides seniors with a block of money to go out into the private insurance market and buy insurance. Samuelson and other hacks on the right call that "Medicare". But it's Medicare in the same way that the government dissolving the US Army and instead paying private contractors to wage war on its behalf wouldn't "destroy" the US Army. Sure, there would still be an institution providing defense services, but that doesn't mean that it would be the US Army. Plain and simple, saying that vouchers destroy Medicare is nothing more than calling a spade a spade. Now, you can argue that a voucher program would do a better job of delivering health care to seniors, or that it would save money (the second claim is perhaps, in a vague sense, true; if you cut services enough, you could cut costs. Literally all of the evidence refutes the first claim). But that doesn't mean that a voucher program is the same thing as Medicare; it's a scheme to destroy Medicare and replace it with a voucher system.
The second claim Samuelson makes is, if it's possible, even worse than the first. Samuelson says that a voucher scheme wouldn't "privatize" Medicare because... Medicare is already private. Now, if Samuelson is serious about that claim, he's stupid. I think, more likely, he thinks his readers are stupid. Medicare is NOT privatized because Medicare isn't a hospital or a drug provider or any other provider of medical services. Medicare is an insurer-- it's the entity that pays for medical treatment, not the one that provides it. Imagine for a moment that the government gave you an option to buy homeowners insurance (call it GovInsCo). It would pay all of the costs of repairing your home if it was destroyed in a natural disaster. In essence, you'd submit your receipts for home repair to GovInsCo, and it would cover up to a certain amount in repairs. Would you call that a "private" program just because the repair company you hired to fix your house would be privately owned? I doubt even Samuelson would be audacious enough to make that claim, but he persists with making the claim about medicine.
What Samuelson does, in short, is get worked up over those who point out that a voucher scheme replacing Medicare would, in fact, "end" Medicare, since no government-run insurance plan for the elderly would exist. And handing seniors money to buy private insurance in its place would, in fact, be a "privatization" of Medicare, as it would take seniors out of a government-administered health insurance program and instead hand them vouchers to buy private insurance. In short, just because Samuelson recognizes that people overwhelmingly like Medicare, and don't like the idea of privatizing it, he insists that a plan to do just that is... something else.
It's an approach that is, at its root, profoundly dishonest.
But Robert Samuelson is a different breed-- he's the "reasonable" ideologue. He likes to talk about being committed to "fair", and "unbiased" reporting, and faults others for "twisting" the rhetoric or facts to match their political preferences. He accuses the "liberal" mainstream media of doing it most, this time in a column about Medicare reform. Here's the crux of his claim (not in order, but it gets at the key arguments:
But many Democrats despise vouchers, which (they say) would “privatize Medicare” and “end Medicare.” The language is self-serving demagoguery intended to terrify seniors. Unfortunately, some in the media sometimes sloppily adopt these attack phrases as acceptable descriptions.
...
These descriptions aren’t acceptable, because they don’t reflect reality. The fact that some voucher advocates also use “privatize” doesn’t change matters. Consider.
Vouchers would not “end Medicare.” Fundamentally, Medicare promises health-care coverage to most Americans 65 and over. We call this an “entitlement.” The entitlement wouldn’t end. The federal government would still pay for coverage. In this basic sense, Medicare vouchers don’t threaten the program.
...
But similar changes can occur — and already have — under the present system. If the government cuts reimbursement rates for some services, those services may become less available. In 1997, that’s precisely what happened with home health care services. The American Medical Association has repeatedly warned that if Medicare reimbursement rates are held down, fewer doctors will see Medicare patients. Similarly, premiums for wealthier recipients have already been raised for doctors’ services and drug coverage.
Vouchers wouldn’t “privatize Medicare.”The reason is simple: Medicare has always been “privatized.” Most doctors who receive Medicare reimbursement aren’t government doctors. Similarly, most hospitals are private, whether for-profit or not-for-profit. Drug and medical-device companies are private. Under the Medicare Advantage program, insurance companies already offer competing plans for about 25 percent of recipients. They offer “Medigap” insurance (plans that cover what Medicare doesn’t) to another 18 percent of recipients.
Samuelson's claim is that, because a voucher program would involve some government support to help seniors buy health insurance, that doing so wouldn't "end" Medicare. He suggests that talking about "privatizing" Medicare is misleading because Medicare is already privatized, in the sense that Medicare doesn't employ medical practitioners. His first claim is enormously disingenuous. His second is either patently dishonest, or reflects deep stupidity.
To begin with, it helps to understand what Medicare is. Simply put, it's a government-run health insurance provider for senior citizens. That means that, once you're eligible, government provides you with health insurance that allows you to have your treatment paid for by Medicare. One simple way to think about it is that's Blue Cross/Blue Shield for the elderly. Now, it doesn't have to cover everything-- you can decide that Medicare should cover only certain procedures, or should have a certain deductible, or something along those lines. In practice, those kinds of changes happen all the time (and Samuelson describes them, dishonestly, as similar to a voucher scheme). Those kinds of changes, if draconian enough, could be fairly said to gut Medicare. But so long as a government-run insurance plan remained in place, it would still be Medicare.
A voucher scheme, as contemplated by the right, gets rid of that health insurance program. Instead, it provides seniors with a block of money to go out into the private insurance market and buy insurance. Samuelson and other hacks on the right call that "Medicare". But it's Medicare in the same way that the government dissolving the US Army and instead paying private contractors to wage war on its behalf wouldn't "destroy" the US Army. Sure, there would still be an institution providing defense services, but that doesn't mean that it would be the US Army. Plain and simple, saying that vouchers destroy Medicare is nothing more than calling a spade a spade. Now, you can argue that a voucher program would do a better job of delivering health care to seniors, or that it would save money (the second claim is perhaps, in a vague sense, true; if you cut services enough, you could cut costs. Literally all of the evidence refutes the first claim). But that doesn't mean that a voucher program is the same thing as Medicare; it's a scheme to destroy Medicare and replace it with a voucher system.
The second claim Samuelson makes is, if it's possible, even worse than the first. Samuelson says that a voucher scheme wouldn't "privatize" Medicare because... Medicare is already private. Now, if Samuelson is serious about that claim, he's stupid. I think, more likely, he thinks his readers are stupid. Medicare is NOT privatized because Medicare isn't a hospital or a drug provider or any other provider of medical services. Medicare is an insurer-- it's the entity that pays for medical treatment, not the one that provides it. Imagine for a moment that the government gave you an option to buy homeowners insurance (call it GovInsCo). It would pay all of the costs of repairing your home if it was destroyed in a natural disaster. In essence, you'd submit your receipts for home repair to GovInsCo, and it would cover up to a certain amount in repairs. Would you call that a "private" program just because the repair company you hired to fix your house would be privately owned? I doubt even Samuelson would be audacious enough to make that claim, but he persists with making the claim about medicine.
What Samuelson does, in short, is get worked up over those who point out that a voucher scheme replacing Medicare would, in fact, "end" Medicare, since no government-run insurance plan for the elderly would exist. And handing seniors money to buy private insurance in its place would, in fact, be a "privatization" of Medicare, as it would take seniors out of a government-administered health insurance program and instead hand them vouchers to buy private insurance. In short, just because Samuelson recognizes that people overwhelmingly like Medicare, and don't like the idea of privatizing it, he insists that a plan to do just that is... something else.
It's an approach that is, at its root, profoundly dishonest.
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