This morning, the NCAA handed down a punishment for Penn State for the Jerry Sandusky cover up. It doesn't look pretty for Penn State football. They have to donate $60 million to an endowment to protect children, give up 10 scholarships a year for 4 years, have their total scholarships reduced from 85 to 65, and are banned from playing in bowls for 4 years. On top of that, Joe Paterno had to vacate all of his coaching wins after 1998. The response from much of the Penn State community has been... sadly predictable. They're calling their new university president (who signed a consent decree acquiescing to the punishment) a coward. They've got some ridiculous conspiracy theory about Louis Freeh, their Board of Trustees, and ESPN all conspiring against them to soil Saint Paterno's legacy. They claim the punishment doesn't do anything for the victims and unnecessarily punishes their players and community for something they had nothing to do with. And, besides the players part, this completely misses the picture.
Their most common claim is that the Freeh Report made inferences regarding certain facts, and came to conclusions based on circumstantial evidence. Because of that, Paterno is somehow being crucified without being granted due process. Which is an entirely banal and stupid argument. Due process rights are granted to people in criminal trials. They have a different standard of proof because we think that criminal penalties for innocent people are really, really bad. This isn't a criminal case. It's not even a civil case (where the standard of proof is a preponderance of the evidence). It's a private governing body's investigation. The Freeh Report is damning in what it says about Joe Paterno. Plainly, it makes a strong case that, amid multiple reports that his former top assistant was raping young boys, he actively engaged in a cover-up, lobbied against suggestions that university administrators go to the police, and concerned himself with what was good for his football program at the expense of past, present, and future victims of a seriously horrific crime. In a way, Paterno and the others were just as bad as Sandusky-- true, they didn't rape young boys themselves. But they were more calculating and deliberate. Sandusky is a sick, sick person-- you almost have to be to do what he did. That doesn't excuse or justify his horrific crimes, but it does mean that he has serious delusions about them; people who don't have those delusions and have reason to suspect that they're occurring have a moral duty to make sure that those things can't happen, especially when they're happening on their watch (and yes, Sandusky did it on their watch, even after he formally retired).
It's certainly true that the punishment does some damage to those who don't deserve it; players who want to play at Penn State will either have to resign themselves to never playing in a bowl, or they'll have to transfer (though the NCAA has made that easier in this case). But what the penalties do, in a blunt way, is absolutely what should be done-- cut the football program at the school down to size. Because that was really the heart of the institutional problem there. Paterno wasn't just the football coach at Penn State-- he was the face of the university. Before this incident broke, 99.99% of Americans outside of Penn State students and alumni had no clue who the president and athletic director were. And, while that's the case at a lot of major D-I schools, Paterno wielded a power at Penn State that was almost unprecedented.
Mike Krzyzewski is by far the best-known employee of Duke University. You could say the same for a whole lot of big-time college football and basketball coaches. Bob Knight was a legend at Indiana. But what seems unique about Penn State was that Joe Paterno was no one's employee. When Bob Knight got himself into trouble at Indiana, he got some leeway. Then he was forced out. If Krzyzewski at Duke were found to have likely covered up a single rape (or, for that matter, any number of less egregious crimes), you can bet the university would dump him, no questions asked. And I don't even like Krzyzewski or Duke. When Penn State tried to push Paterno out the door in 2004, he laughed, told them he wasn't going anywhere, and that was that. His players were exempted from incoming freshman sexual assault education at Penn State. Paterno fought (successfully) to keep them out of the university's disciplinary procedure. The football program was its own fiefdom, and Paterno was the top dog. When the child abuse allegations came to light, it was ultimately Paterno who had the last word. There was an exchange in the Freeh Report where I believe the AD and a top VP agreed to go to child welfare with the 2001 allegations. Then, a subsequent e-mail from the AD said that after speaking with "Joe", he was no longer "comfortable" with that course of action. It's clear that Paterno was at least his ostensible superiors' equal. In all likelihood, they answered to him just as much as, if not more than, he answered to them.
It was this dynamic that needed to be fixed. Joe Paterno ostensibly did some very good things at Penn State-- he graduated a lot of players, he donated a good chunk of money to build a library, and I'm sure plenty of his players have great things to say about him. But, as a person, he was an enormous moral failure. Covering up child rape isn't "one mistake"-- shoplifting is one mistake. Getting into a fight is one mistake. Cheating on a test is one mistake. Even robbing the bank is one mistake. Doing nothing when you have ANY reason to believe a child predator is not just loose, but making use of your facilities to commit his crimes is an enormous moral failure that defines you. The lives of many, possibly tens, of people have been ruined because Paterno stood by and did nothing.
And, in large part, it was the devotion to Paterno and to football that allowed it to happen. Because Paterno talked a lot about honor (though he turned out to have none), graduated more players than most college football coaches, and donated some money to the library, the assumption was that he should get leeway to run his football programs as he sees fit. He was beyond the reach of the administration. In an important sense, he was the most powerful person on Penn State's campus. And he turned out to be a moral coward. But he couldn't have done that on his own. To become that powerful, he needed a campus culture that acceded to it. He needed administrators who wouldn't, or couldn't, push him. He needed students and alumni who saw him as a god. And he got that. The punishment of the football program lashes out at Penn State football because, in an important regard, Penn State football is the problem. Not the players or Bill O'Brien (the current coach), or those people, but the mindset that Penn State football is "above the law" at the university. Crippling that program will hopefully break that hold-- it will put football into a proper perspective. It's a lot of fun, it's a community event for students and alumni, and it's a source of pride. In plenty of cases, it's an incubator of future pros. But, even if football players at Penn State are separate from the rest of the campus (as they are at most high D-I schools), they can't be above reproach-- they should have to attend campus safety workshops with other students; when they do something wrong, they should be punished like other students; and, if something goes wrong that necessitates a response from the administration, they should be subject to sanctions, same as any other students.
At Penn State, the myth of Saint Joe is, in large part, what allowed a child predator to continue raping kids for well over a decade, even though there was smoke out there indicating that he was a problem. Dismantling that mentality is what the sanctions aim to do. And Penn State students and alumni who cry about the "lynching" of Paterno and the victimization of the football program are prime evidence of why that program needs to be sanctioned in that way-- hopefully losing some games will put football and the coach's role in its proper perspective at a place where it was horribly, tragically out of whack.
Monday, July 23, 2012
Wednesday, July 18, 2012
Romney at Bain, and Romney's taxes
The past few weeks haven't been good to Mitt Romney. He's been hit with two body shots, one after the other, relating to his character. There was also something about a horse, but I didn't bother to read about that one-- it might be a nice punchline, but not much more. Of the bigger stories, the first came when the Boston Globe uncovered SEC filings that listed Romney as CEO, President, Chairman of the Board, and sole stockholder of Bain Capital entities as late as 2002, seemingly contradicting his claim that he left Bain in 1999 to run the Olympics and shouldn't be held responsible for offshoring decisions the firm made in regards to certain portfolio companies in the time between Romney's departure and the time when he ceased to be listed in SEC filings. The second came when Romney continually stonewalled efforts to get him to release tax returns. To date, Romney's released the returns from 2010, and those were incomplete (an addition requiring disclosures about offshore accounts is missing). He hasn't released anything else. By comparison, John McCain released 2 years in 2008 (and those weren't particularly interesting; McCain is rich, in conventional terms, but he's solidly middle class compared to the mega-wealthy Romney). John Kerry released 20 years in 2004. Romney's own father, George, released 12 years when he ran for the Republican nomination in 1968. Romney's continually stonewalled any efforts to get additional taxes, which has predictably stirred up a firestorm over what's in his returns. One of those attacks, I think, has merit. The other doesn't.
The first attack is, I think, almost entirely baseless. Lying in SEC filings is certainly a felony. And Romney has been claiming that he left Bain in 1999 to run the Olympics. But my understanding of the filings is that Romney is listed in that capacity for particular Bain entities, rather than the Bain Capital partnership itself (which, of course, makes sense; a partnership the size of Bain Capital doesn't have just one partner, especially one like Bain where there is no charismatic founder or pair of founders inextricably tied to the company a la Henry Kravis and George Roberts at KKR or Pete Peterson and Steve Schwartzman at Blackstone). And, if you really think about it, the story doesn't pass the smell test. Unless you think Romney set up a remote office in Utah and was letting others run the Olympics while he ran Bain from Salt Lake City, there aren't enough hours in a day for anyone to manage two projects of that size.
My bet is this: Romney figured he would be going back to Bain when he left in 1999. He kept some formal authority, but his partners effectively ran the company day to day, while he came back on occasion in more or less a part-time advisory role. They continued to list him as "chairman, president, CEO and sole shareholder" of pass-through entities that distribute payroll and the like (PE funds are set up as a pyramid of different entities for limited liability and tax purposes), but which didn't actually make business decisions or earn profits. It certainly looks bad to a layperson, but it makes perfect sense. And, when you come right down to it, trying to run with it is a waste of time that could be spent looking at more important issues. Now, that doesn't mean that everything that happened after 1999 should be off-limits to attackers; if you buy the anti-Bain line from 1999-2002 hook, line and sinker, it's pretty disingenuous to think that the company somehow transformed when Romney left to run the Olympics, from "job creator" to "job destroyer". A company builds a particular culture. Romney was at the forefront of founding Bain, and he was there for almost two decades. It's not very credible to suggest that the company started doing things in 2000 that it wouldn't have done in 1999 just because Romney left. Whether offshoring is a problem is a separate issue altogether, but if you believe that it is, the "I left in 1999" defense doesn't pass the smell test, even if it's true that he wasn't running the company day to day.
The tax issue, on the other hand, is much more problematic for Romney. There's a long tradition of candidates for president releasing tax returns to the press. While private citizens' returns are certainly their own business, politicians' returns can be very relevant. They present a window into how the candidates conducted their financial affairs in the past. They demonstrate the candidate's values, how far they'll go to avoid taxes, and what kinds of investments they make. Romney's been historically difficult in withholding his returns. And that's a giant red flag. Now, the reality is this. There's a lot of speculation about what this means. But much of the speculation is pretty mundane. I would think releasing it would get media buzz for 3-4 days, and then people would get sick of it. If that's the case, I have to think the Romney political team would bite the bullet, release 4-6 years of returns, take the hit, and move on. But his aggressive refusal to do so doesn't pass the smell test-- it seems that there's something there, and chances are pretty good that it's something that would resonate, and not in a positive way.
I've seen a couple of plausible theories about what this is. One is that Romney paid no tax at all in 2009. This could have happened if he'd taken a hefty long-term capital loss that he could use to offset income. A man worth $250-500 million paying 0 in taxes in a given year isn't exactly a winning proposition to sell the public. It's something I would note, but, to me, it wouldn't be fatal. Though I'm not an election watcher, so the way I'd react may be different from the way others would react. Another possibility is that Romney took advantage of the 2009 IRS amnesty on Swiss bank accounts. Swiss bank accounts are useful to mega-rich people in that they used to provide substantial secrecy, which could be used to shield foreign holdings from scrutiny, play clever games with the tax code to adjust the basis of asset sales, or evade US taxes. The amnesty provision allowed offenders to pay limited penalties upon closing the accounts while remaining anonymous. If Romney took advantage, it would indicate that he was a tax cheat. And that definitely doesn't look so good for someone worth as much as him. A final theory that seems possible is that Romney has substantial holdings in China, and is bullish on the Chinese. That one's pretty mundane-- he's entitled to believe in China's economy. The issue that raises, though, is about honesty, since Romney talks bluntly about how harmful China's currency manipulation is to the US (which is actually something he's not wrong about, though I think China's slowdown is hardly the time to start waving a sword at the Chinese). That would look bad politically, and just confirm how disingenuous a politician Romney is, but it wouldn't be fatal. I tend to think that that's the best-case scenario for him. Though I guess we'll never know unless he caves to the pressure and releases his returns...
The first attack is, I think, almost entirely baseless. Lying in SEC filings is certainly a felony. And Romney has been claiming that he left Bain in 1999 to run the Olympics. But my understanding of the filings is that Romney is listed in that capacity for particular Bain entities, rather than the Bain Capital partnership itself (which, of course, makes sense; a partnership the size of Bain Capital doesn't have just one partner, especially one like Bain where there is no charismatic founder or pair of founders inextricably tied to the company a la Henry Kravis and George Roberts at KKR or Pete Peterson and Steve Schwartzman at Blackstone). And, if you really think about it, the story doesn't pass the smell test. Unless you think Romney set up a remote office in Utah and was letting others run the Olympics while he ran Bain from Salt Lake City, there aren't enough hours in a day for anyone to manage two projects of that size.
My bet is this: Romney figured he would be going back to Bain when he left in 1999. He kept some formal authority, but his partners effectively ran the company day to day, while he came back on occasion in more or less a part-time advisory role. They continued to list him as "chairman, president, CEO and sole shareholder" of pass-through entities that distribute payroll and the like (PE funds are set up as a pyramid of different entities for limited liability and tax purposes), but which didn't actually make business decisions or earn profits. It certainly looks bad to a layperson, but it makes perfect sense. And, when you come right down to it, trying to run with it is a waste of time that could be spent looking at more important issues. Now, that doesn't mean that everything that happened after 1999 should be off-limits to attackers; if you buy the anti-Bain line from 1999-2002 hook, line and sinker, it's pretty disingenuous to think that the company somehow transformed when Romney left to run the Olympics, from "job creator" to "job destroyer". A company builds a particular culture. Romney was at the forefront of founding Bain, and he was there for almost two decades. It's not very credible to suggest that the company started doing things in 2000 that it wouldn't have done in 1999 just because Romney left. Whether offshoring is a problem is a separate issue altogether, but if you believe that it is, the "I left in 1999" defense doesn't pass the smell test, even if it's true that he wasn't running the company day to day.
The tax issue, on the other hand, is much more problematic for Romney. There's a long tradition of candidates for president releasing tax returns to the press. While private citizens' returns are certainly their own business, politicians' returns can be very relevant. They present a window into how the candidates conducted their financial affairs in the past. They demonstrate the candidate's values, how far they'll go to avoid taxes, and what kinds of investments they make. Romney's been historically difficult in withholding his returns. And that's a giant red flag. Now, the reality is this. There's a lot of speculation about what this means. But much of the speculation is pretty mundane. I would think releasing it would get media buzz for 3-4 days, and then people would get sick of it. If that's the case, I have to think the Romney political team would bite the bullet, release 4-6 years of returns, take the hit, and move on. But his aggressive refusal to do so doesn't pass the smell test-- it seems that there's something there, and chances are pretty good that it's something that would resonate, and not in a positive way.
I've seen a couple of plausible theories about what this is. One is that Romney paid no tax at all in 2009. This could have happened if he'd taken a hefty long-term capital loss that he could use to offset income. A man worth $250-500 million paying 0 in taxes in a given year isn't exactly a winning proposition to sell the public. It's something I would note, but, to me, it wouldn't be fatal. Though I'm not an election watcher, so the way I'd react may be different from the way others would react. Another possibility is that Romney took advantage of the 2009 IRS amnesty on Swiss bank accounts. Swiss bank accounts are useful to mega-rich people in that they used to provide substantial secrecy, which could be used to shield foreign holdings from scrutiny, play clever games with the tax code to adjust the basis of asset sales, or evade US taxes. The amnesty provision allowed offenders to pay limited penalties upon closing the accounts while remaining anonymous. If Romney took advantage, it would indicate that he was a tax cheat. And that definitely doesn't look so good for someone worth as much as him. A final theory that seems possible is that Romney has substantial holdings in China, and is bullish on the Chinese. That one's pretty mundane-- he's entitled to believe in China's economy. The issue that raises, though, is about honesty, since Romney talks bluntly about how harmful China's currency manipulation is to the US (which is actually something he's not wrong about, though I think China's slowdown is hardly the time to start waving a sword at the Chinese). That would look bad politically, and just confirm how disingenuous a politician Romney is, but it wouldn't be fatal. I tend to think that that's the best-case scenario for him. Though I guess we'll never know unless he caves to the pressure and releases his returns...
Tuesday, July 10, 2012
The inanity of presidential campaigns
What's struck me about this presidential campaign is just how inane politicians' election platforms are. They're inane in the way that they promote their own candidates, and they're inane in the way that they attack other candidates. Even if they pick the right issues, I feel like the campaigns draw all the wrong conclusions in the way that they sell themselves on those issues. Two cases in point: the Obama campaign's attack on Romney's taxes, and the Romney campaign's promotion of his time as the chief of Bain Capital and what it means.
The gist of the Obama campaign's attacks on Romney's taxes seems to be that 1) Romney is rich, 2) Romney doesn't pay much in taxes, and 3) Romney holds assets in foreign accounts for tax purposes. Which are (or have recently been) all true. But, in a very substantial sense, they're entirely beyond the point. The link the attacks want viewers to draw is that Romney is dodging taxes, and this makes him "ruthless", and "out of touch", or something along those lines. And if you extrapolate from that that he's doing something illegal, that's a plus for them. Now, to be clear, I don't think there's anyone outside of the fringe who thinks Romney is engaging in tax fraud. At the least, there's no evidence of it. What he's doing is what every rich person (or really every person who bothers to do their own taxes) does-- structuring his investments in such a way that he ends up keeping as much after-tax money as possible to use as he sees fit, whether to buy himself another yacht, or to give more money to a charity or church that he likes. And more power to him for that-- rich liberals do the exact same thing.
For me, all that line of attack does is demonstrate that Mitt Romney made a whole lot of money and engages in tax planning. Shoot him. The more effective line of attack, I think, is to tie the amount of taxes Romney pays to the amount of taxes he supports. There are plenty of rich people in the US. There are plenty of rich people who pay very little in taxes. Warren Buffett has a bigger tax bill than Romney, percentage-wise, but not by all that much. But the difference between Romney and Buffett is that Buffett sees this state of affairs as problematic, while Romney sees it as good and natural. Buyout barons aren't dishing out $50,000 a plate to go to the Hamptons and feed the Romney campaign because they think Obama's policies are destroying the economy-- half of them know a lot about buying companies and very little about anything else. They're out there because they're afraid that, under President Obama, they might have to hand over an extra $5 million of next year's $50 million. And if there's one thing buyout barons think, it's that they earn every penny of those millions. But I'd guess that Barbara the Office Manager making $45,000 a year isn't all that amused that she's paying as much of her income in taxes to the government as Steve Schwarzman at Blackstone. A persuasive implication of the Romney tax bill for me isn't, "Look how out of touch Mitt Romney is, he doesn't pay much in taxes." It's "Look how little Mitt Romney pays in taxes; he thinks this is the natural way things should be; President Obama thinks people who have built their wealth in America, have used America's resources to do it, have workers educated in America's public schools, whose parents' health care is paid for by America's government should give a bit more back to keep America great than people who have been less fortunate." The attack shouldn't be that we need to soak the rich; it should be that we're all in it together, and that means the rich as well as the middle class should pay their fair share.
Then there's the Romney campaign's promotion of his record at Bain Capital. And there's no doubt that his time there was extraordinarily successful. His first fund averaged annual returns of over 80%, which is extraordinary even in the rarefied air of private equity. He earned a whole lot of money, and is now worth somewhere between a quarter and half a billion dollars, which makes him mega-rich. The Romney campaign claims that his time at Bain makes him uniquely well-equipped to create jobs, and that attacks on his time there amount to an attack on success. The second claim is hogwash-- being rich or successful doesn't qualify someone to be president. George Soros is arguably the most successful hedge fund manager of all time-- if wealth equates to success, he's got Romney trumped. Romney counts as mega-wealthy with a net worth of up to half a billion. Soros is worth about 40 times that, $20 billion. And he's given away another $8-10 billion or so. Despite this sterling career, I don't know of anyone who thinks that being a great hedge fund manager somehow qualifies Soros to run a country. Heck, I wouldn't hire him to run the Treasury or the Fed either. While he's a unique investor with a legendary understanding of markets, he's not a policymaker, and pretending that knowing how to make money in one way makes him good at everything is completely backward thinking.
The other claim Romney makes is that his time at Bain taught him how to create jobs. This is also nonsense. To begin with, private equity is NOT in the job creation business-- it's in the return on investment business. If this means adding jobs, great. If it means slashing jobs, no problem. If it means cutting company employees and outsourcing their work, well, that's the price of business. This isn't the "wrong" thing to do-- they're a business, not a charity. But that analogy runs another way-- business isn't a charity, but government isn't a business. This is a line of attack that the Obama campaign hasn't mentioned, but it's one that is profoundly true, and should be hammered home. Even in business areas that are more closely in the innovation rather than financial engineering business, like technology and manufacturing, running a big company has very little in common with running a country. While laying out the differences between a business and a country would take a whole post, it suffices to say that a business 1) doesn't sell 80% of its product to its own employees, 2) seeks to maximize a single metric, such as return on equity or stock price, rather than balance competing social goals that are often in tension, and 3) is, unlike a country, in direct competition with others in its industry. Lost profit opportunities for Bain will be picked up by KKR. A bad fund performance for KKR means client money will run to Blackstone. By contrast, if China goes into recession, the US doesn't "win"; it loses a huge potential market for things it produces. Running a private equity firm doesn't make Romney a job creator. It doesn't qualify him to run a country. And it doesn't mean he has a secret formula from his time at Bain that he can apply to restore America's success.
But here's what Romney CAN claim his time at Bain means-- that he knows how to manage an organization. While a government runs nothing like a company, the West Wing of the White House DOES operate somewhat like a company unit. The President is, in a very real sense, the CEO of the west wing. He needs to synthesize advice coming at him from a number of different advisers. He needs to deploy those advisers to their most productive uses, taking advantage of their skills. And he needs to combine their input to make good political and policy decisions. This is, I think, President Obama's biggest weakness. I don't think he's been a particularly effective manager as president, and the result has been a first term that's lacked focus and has too often seemed afflicted with terrible ADD. He's had exceptionally talented people advising him on all different kinds of policy matters, but he can't seem to come to any kind of conclusion about who's right. The result has been a first term that's lacked vision. This is where Romney can draw a contrast. As head of a buyout firm, while he was managing an organization that looked nothing like a government, the skills he can claim to have cultivated may well be very transferable. If he can argue that he can parlay his time as an executive into the ability to quickly and effectively synthesize information, develop a strategy, and execute that strategy, he can draw a contrast between his own focus and the disjointedness that's seemed to plague the Obama administration.
What might really be a compelling line from Romney would sound something like this: I'm not going to claim to be a job creator, but I will claim that I can manage this government more effectively than the President has. Of course, for campaigns, sound bites and polling trump true arguments and sound logic, but it might be refreshing to see the campaigns change tack just a little bit.
The gist of the Obama campaign's attacks on Romney's taxes seems to be that 1) Romney is rich, 2) Romney doesn't pay much in taxes, and 3) Romney holds assets in foreign accounts for tax purposes. Which are (or have recently been) all true. But, in a very substantial sense, they're entirely beyond the point. The link the attacks want viewers to draw is that Romney is dodging taxes, and this makes him "ruthless", and "out of touch", or something along those lines. And if you extrapolate from that that he's doing something illegal, that's a plus for them. Now, to be clear, I don't think there's anyone outside of the fringe who thinks Romney is engaging in tax fraud. At the least, there's no evidence of it. What he's doing is what every rich person (or really every person who bothers to do their own taxes) does-- structuring his investments in such a way that he ends up keeping as much after-tax money as possible to use as he sees fit, whether to buy himself another yacht, or to give more money to a charity or church that he likes. And more power to him for that-- rich liberals do the exact same thing.
For me, all that line of attack does is demonstrate that Mitt Romney made a whole lot of money and engages in tax planning. Shoot him. The more effective line of attack, I think, is to tie the amount of taxes Romney pays to the amount of taxes he supports. There are plenty of rich people in the US. There are plenty of rich people who pay very little in taxes. Warren Buffett has a bigger tax bill than Romney, percentage-wise, but not by all that much. But the difference between Romney and Buffett is that Buffett sees this state of affairs as problematic, while Romney sees it as good and natural. Buyout barons aren't dishing out $50,000 a plate to go to the Hamptons and feed the Romney campaign because they think Obama's policies are destroying the economy-- half of them know a lot about buying companies and very little about anything else. They're out there because they're afraid that, under President Obama, they might have to hand over an extra $5 million of next year's $50 million. And if there's one thing buyout barons think, it's that they earn every penny of those millions. But I'd guess that Barbara the Office Manager making $45,000 a year isn't all that amused that she's paying as much of her income in taxes to the government as Steve Schwarzman at Blackstone. A persuasive implication of the Romney tax bill for me isn't, "Look how out of touch Mitt Romney is, he doesn't pay much in taxes." It's "Look how little Mitt Romney pays in taxes; he thinks this is the natural way things should be; President Obama thinks people who have built their wealth in America, have used America's resources to do it, have workers educated in America's public schools, whose parents' health care is paid for by America's government should give a bit more back to keep America great than people who have been less fortunate." The attack shouldn't be that we need to soak the rich; it should be that we're all in it together, and that means the rich as well as the middle class should pay their fair share.
Then there's the Romney campaign's promotion of his record at Bain Capital. And there's no doubt that his time there was extraordinarily successful. His first fund averaged annual returns of over 80%, which is extraordinary even in the rarefied air of private equity. He earned a whole lot of money, and is now worth somewhere between a quarter and half a billion dollars, which makes him mega-rich. The Romney campaign claims that his time at Bain makes him uniquely well-equipped to create jobs, and that attacks on his time there amount to an attack on success. The second claim is hogwash-- being rich or successful doesn't qualify someone to be president. George Soros is arguably the most successful hedge fund manager of all time-- if wealth equates to success, he's got Romney trumped. Romney counts as mega-wealthy with a net worth of up to half a billion. Soros is worth about 40 times that, $20 billion. And he's given away another $8-10 billion or so. Despite this sterling career, I don't know of anyone who thinks that being a great hedge fund manager somehow qualifies Soros to run a country. Heck, I wouldn't hire him to run the Treasury or the Fed either. While he's a unique investor with a legendary understanding of markets, he's not a policymaker, and pretending that knowing how to make money in one way makes him good at everything is completely backward thinking.
The other claim Romney makes is that his time at Bain taught him how to create jobs. This is also nonsense. To begin with, private equity is NOT in the job creation business-- it's in the return on investment business. If this means adding jobs, great. If it means slashing jobs, no problem. If it means cutting company employees and outsourcing their work, well, that's the price of business. This isn't the "wrong" thing to do-- they're a business, not a charity. But that analogy runs another way-- business isn't a charity, but government isn't a business. This is a line of attack that the Obama campaign hasn't mentioned, but it's one that is profoundly true, and should be hammered home. Even in business areas that are more closely in the innovation rather than financial engineering business, like technology and manufacturing, running a big company has very little in common with running a country. While laying out the differences between a business and a country would take a whole post, it suffices to say that a business 1) doesn't sell 80% of its product to its own employees, 2) seeks to maximize a single metric, such as return on equity or stock price, rather than balance competing social goals that are often in tension, and 3) is, unlike a country, in direct competition with others in its industry. Lost profit opportunities for Bain will be picked up by KKR. A bad fund performance for KKR means client money will run to Blackstone. By contrast, if China goes into recession, the US doesn't "win"; it loses a huge potential market for things it produces. Running a private equity firm doesn't make Romney a job creator. It doesn't qualify him to run a country. And it doesn't mean he has a secret formula from his time at Bain that he can apply to restore America's success.
But here's what Romney CAN claim his time at Bain means-- that he knows how to manage an organization. While a government runs nothing like a company, the West Wing of the White House DOES operate somewhat like a company unit. The President is, in a very real sense, the CEO of the west wing. He needs to synthesize advice coming at him from a number of different advisers. He needs to deploy those advisers to their most productive uses, taking advantage of their skills. And he needs to combine their input to make good political and policy decisions. This is, I think, President Obama's biggest weakness. I don't think he's been a particularly effective manager as president, and the result has been a first term that's lacked focus and has too often seemed afflicted with terrible ADD. He's had exceptionally talented people advising him on all different kinds of policy matters, but he can't seem to come to any kind of conclusion about who's right. The result has been a first term that's lacked vision. This is where Romney can draw a contrast. As head of a buyout firm, while he was managing an organization that looked nothing like a government, the skills he can claim to have cultivated may well be very transferable. If he can argue that he can parlay his time as an executive into the ability to quickly and effectively synthesize information, develop a strategy, and execute that strategy, he can draw a contrast between his own focus and the disjointedness that's seemed to plague the Obama administration.
What might really be a compelling line from Romney would sound something like this: I'm not going to claim to be a job creator, but I will claim that I can manage this government more effectively than the President has. Of course, for campaigns, sound bites and polling trump true arguments and sound logic, but it might be refreshing to see the campaigns change tack just a little bit.
Monday, July 9, 2012
Tax policy, Mitt Romney and "job creators"
Tax policy is, without a doubt, one of the biggest issues dividing Democrats and Republicans. The left argues that the mega-rich are under-taxed, while the right loves to claim that taking money out of the pockets of these "job creators" means everyone else's jobs disappear, too. Now, the Republican argument about taxes at this point is convoluted and hard to disentangle. Rhetorically, it's a mess, but there are elements of logic to it that are useful to untangle. The first issue is that they conflate short-run arguments with long-run arguments, so that's probably the place to begin.
The argument goes that raising taxes on anyone (including the "job creators") is contractionary fiscal policy-- it takes money that consumers could be spending out of the economy and puts it into the government's coffers. In the present circumstances, strictly speaking, this is true so long as tax cuts are paid for by borrowing rather than by cutting government spending. Although they like to pretend that private spending is somehow qualitatively better than government spending, the reality is that the government buying a Volvo for $30,000 and Bob from Jersey buying a Volvo for $30,000 is economically identical in terms of GDP, so a $30,000 tax cut matched with a $30,000 government spending cut is growth-neutral if you assume away secondary effects. What's interesting about that argument is just how vehemently Republicans reject the same exact logic when it applies to cuts to government spending. The position that contractionary fiscal policy is only contractionary when it involves tax hikes and not when it involves spending cuts is not only economically incoherent, but more than likely completely backward-- there's considerable evidence of a multiplier effect that applies to government spending more than tax cuts (because tax cuts can be saved while a dollar spent by the government goes directly into the economy). This incoherence aside, what's really interesting is the long-run argument for low tax rates on the Romneys and the Kochs.
Paul Krugman tackles this issue in a very interesting post on his blog. Krugman points out the absurdity of the talk about tax hikes on rich people as some kind of horrible job killer. The usual defense of the right to paying people like Steve Schwarzman, Henry Kravis, Bill Gates, and Mark Zuckerberg tens of millions of dollars annually is that they create a whole lot of value. Let's assume for a second that this is true (though I think Gates and Zuckerberg create a lot more value than Schwarzman or Kravis, but that's a separate issue). The argument is that we can pay Kravis $50 million next year because he's produced $50 million worth of GDP. This is, in fact, the Microeconomics 1 explanation; as Krugman notes, in a perfectly competitive market, workers are paid their marginal product (this assumption is problematic, but for the time being, let's assume this away too). This assumption justifies massive paydays for buyout execs. But it simultaneously destroys the argument that taxing "job creators" at high rates somehow degrades the lives of everyone because they take their magic job creating sauce out of the economy, and the jobs disappear.
But the implication of the labor market model used to justify huge paydays for the mega-wealthy is that their withdrawal from the economy is harmful... only to them. It's useful to illustrate this with an example. Let's assume for a second that Mark Zuckerberg really does contribute $40 million worth of GDP to the economy in a given year, and his paycheck reflects that (this is a much more plausible scenario than the assertion that hedge fund manager John Paulson generated a few billion in GDP shorting the housing market in 2009, but we can set that aside). Let's further assume that Zuckerberg has been reading Ayn Rand novels, which has turned him into a loony sociopath, and he's decided that the government is snatching too much of his hard-earned cash. So he's going to go on "capital strike" like the Randian hero John Galt and go sit in a valley in Utah and deny the economy his skills. The economy is $40 million poorer because Mark Zuckerberg isn't participating... and the economy is also paying $40 million less to Mark Zuckerberg to add $40 million to the economy. To believe that Mark Zuckerberg leaving the economy in this scenario is a net loss to more than just Mark Zuckerberg, you have to believe that there's a market failure in the executive compensation market, and Zuckerberg is actually being underpaid for his services. I kind of doubt that even they would be audacious enough to make that claim.
As Krugman points out, though, the only real net benefit to an efficiently compensated CEO working rather than going on capital strike is... the taxes they pay to the government coffers, which provides services to others. The socially optimal tax rate for the mega-rich, then, isn't the 14% that Romney pays on his dividends and investments, but the rate that maximizes government tax revenue; in short, the point at the top of the Laffer Curve. In just a few easy steps, then, it becomes apparent that believing in efficient labor markets supports keeping tax rates on the wealthy at the level at which tax revenue is maximized. The inevitable counter-argument will ask why the revenue-maximizing rate shouldn't apply to all earners. And the simple reason is that, where markets exist, it's only the mega-wealthy that can afford to go on "capital strike". Strictly speaking, if the labor market is efficient, a clerk at Wal-Mart earning $7 an hour leaving the labor force will cost the economy only the amount that she earns; the same logic that applies to the CEO applies to the rank and file. However, the unemployed clerk also won't be earning any income to pay for her needs. What this means is that, while the economy only values her up to the value of her salary, if she isn't working, she can't spend that nonexistent salary to support herself. As a result, she starves (or lives off of charity). The economy produces things, in short, because everyone needs things to live. But, for someone who has accumulated enough money to live on forever, assuming an efficient labor market, the only loss to society comes from the lost tax revenue. Otherwise... enjoy the leisure time, John Galt.
Now, I think the most interesting question here is the assumption involving efficient labor markets, and it's something that Krugman doesn't tackle in his post. It's no secret that inequality has exploded in the US-- the rich have gotten REALLY rich, and the poor and middle class have been left behind. In the 1960s, a CEO earned a few tens of times what an average employee earned-- maybe 20 or 30. Today, a CEO earns a few hundred times what an average employee earns-- 400 or so. This means one of two things must be true: either chief executives today are roughly 20 times more skilled now than they were 50 years ago, or the labor market is inefficient. And if the latter is true (which I think is a pretty safe assumption), the movement of income from labor to management and capital means one of two things is true. Either our compensation system used to redistribute wealth from management and capital to labor (in other words, CEOs and investors used to be wildly underpaid, and this subsidized rising wages for workers and the middle class; moreover, they also paid more in taxes then, so being upper-income must have been REALLY hard then...), or our compensation system now redistributes wealth from labor to management and capital.
I think the last statement rings most true, and the reasoning is pretty simple: workers productivity has been rising in the US pretty steadily. We're a technologically superior nation now to what we were when middle class wages stagnated, around 1980 (our communication systems are infinitely faster and more complex). We're a better-educated nation now than we were then. But somehow, in real terms, the gains have flowed almost entirely to the wealthiest 1%, and even more precisely to the wealthiest .1%. To believe that rising inequality is justified by market signals, you have to believe that the only Americans who have improved at what they do in about 30 years are executives, lawyers, doctors, and financiers. To me, that's a pretty hard case to make.
Where all this brings us is to Mitt Romney; both to his tax rate, and to his career at Bain Capital. The Democratic attacks on Romney's taxes have tended to go in the wrong direction. They've focused on how unfair it is that he has offshore accounts and imply that he's done something illegal. Let's be frank: I don't think there's any reason to believe that Romney's done anything illegal or untoward with his taxes. Like anyone, he's minimized his tax revenue under legal constraints. That's all well and good. But the question shouldn't be whether Romney pays an illegally low tax rate, but whether Romney and people like him, in the long run, pay a tax rate that's optimal from a social perspective. The answer to that, I think, is a clear no. Rather, I think our tax code provides a windfall to the mega-rich like Romney, and we should change that policy so that, instead of paying 15 or 20% of his income in taxes, Romney and people like him pay 30 or 35 or, God forbid, 40% of his income in taxes. If that sounds extravagant, it's useful to note that the implication of the efficient labor market postulate says the optimal top marginal tax rate for Romney and high earners like him is over 70% (the rate at which revenue is maximized). No one proposes that... but it should be in the discussion.
A last point concerns Romney's time at Bain Capital. Romney boasted of his work "creating jobs". The reality, though, is that private equity is not in the business of creating jobs. At its best, it's in the business of accelerating "creative destruction" by putting yesterday's companies out of business and paving the way for tomorrow's companies. But there's substantial evidence that what companies like Bain do in part is transfer wealth from labor to management and capital. Previously unionized labor is outsourced to contractors, whose workers receive lower pay and worse benefits. Tenured workers are laid off in favor of younger workers who are cheaper (there are market-based arguments for this, though there are also counter-arguments that workers start at these companies at sub-market wages due to the promise of advancement that used to come with making a career at a particular company). And the windfall goes to... managers, Bain executives, and Bain investors. Now, it's true that those investors aren't just rich folks-- they're pension funds and mutual funds and other retail investors. But it's equally true that a chunk of the gains represent a simple redistribution-- a transfer of wealth from workers to managers and investors that allows them to capture a chunk of society's wealth that is disproportionate to the value of their work.
So I think, in a narrow sense, there is class warfare. And, looking from the sidelines, I get the distinct sense that what we've got is a society in which the very richest are overcompensated, and are overcompensated at the expense of their workers. At the least, this makes a case for taxing them at a substantially higher rate, so that those workers can enjoy more of the benefits that they create, but which don't show up in their paychecks, and hasn't in decades. That, for me, is the way to think about how to make America the middle-class country we used to be, rather than one in which any and all social gains go toward making the rich super-rich instead of making the poor slightly less poor, or the middle class better off. That's not class warfare-- it's economics.
The argument goes that raising taxes on anyone (including the "job creators") is contractionary fiscal policy-- it takes money that consumers could be spending out of the economy and puts it into the government's coffers. In the present circumstances, strictly speaking, this is true so long as tax cuts are paid for by borrowing rather than by cutting government spending. Although they like to pretend that private spending is somehow qualitatively better than government spending, the reality is that the government buying a Volvo for $30,000 and Bob from Jersey buying a Volvo for $30,000 is economically identical in terms of GDP, so a $30,000 tax cut matched with a $30,000 government spending cut is growth-neutral if you assume away secondary effects. What's interesting about that argument is just how vehemently Republicans reject the same exact logic when it applies to cuts to government spending. The position that contractionary fiscal policy is only contractionary when it involves tax hikes and not when it involves spending cuts is not only economically incoherent, but more than likely completely backward-- there's considerable evidence of a multiplier effect that applies to government spending more than tax cuts (because tax cuts can be saved while a dollar spent by the government goes directly into the economy). This incoherence aside, what's really interesting is the long-run argument for low tax rates on the Romneys and the Kochs.
Paul Krugman tackles this issue in a very interesting post on his blog. Krugman points out the absurdity of the talk about tax hikes on rich people as some kind of horrible job killer. The usual defense of the right to paying people like Steve Schwarzman, Henry Kravis, Bill Gates, and Mark Zuckerberg tens of millions of dollars annually is that they create a whole lot of value. Let's assume for a second that this is true (though I think Gates and Zuckerberg create a lot more value than Schwarzman or Kravis, but that's a separate issue). The argument is that we can pay Kravis $50 million next year because he's produced $50 million worth of GDP. This is, in fact, the Microeconomics 1 explanation; as Krugman notes, in a perfectly competitive market, workers are paid their marginal product (this assumption is problematic, but for the time being, let's assume this away too). This assumption justifies massive paydays for buyout execs. But it simultaneously destroys the argument that taxing "job creators" at high rates somehow degrades the lives of everyone because they take their magic job creating sauce out of the economy, and the jobs disappear.
But the implication of the labor market model used to justify huge paydays for the mega-wealthy is that their withdrawal from the economy is harmful... only to them. It's useful to illustrate this with an example. Let's assume for a second that Mark Zuckerberg really does contribute $40 million worth of GDP to the economy in a given year, and his paycheck reflects that (this is a much more plausible scenario than the assertion that hedge fund manager John Paulson generated a few billion in GDP shorting the housing market in 2009, but we can set that aside). Let's further assume that Zuckerberg has been reading Ayn Rand novels, which has turned him into a loony sociopath, and he's decided that the government is snatching too much of his hard-earned cash. So he's going to go on "capital strike" like the Randian hero John Galt and go sit in a valley in Utah and deny the economy his skills. The economy is $40 million poorer because Mark Zuckerberg isn't participating... and the economy is also paying $40 million less to Mark Zuckerberg to add $40 million to the economy. To believe that Mark Zuckerberg leaving the economy in this scenario is a net loss to more than just Mark Zuckerberg, you have to believe that there's a market failure in the executive compensation market, and Zuckerberg is actually being underpaid for his services. I kind of doubt that even they would be audacious enough to make that claim.
As Krugman points out, though, the only real net benefit to an efficiently compensated CEO working rather than going on capital strike is... the taxes they pay to the government coffers, which provides services to others. The socially optimal tax rate for the mega-rich, then, isn't the 14% that Romney pays on his dividends and investments, but the rate that maximizes government tax revenue; in short, the point at the top of the Laffer Curve. In just a few easy steps, then, it becomes apparent that believing in efficient labor markets supports keeping tax rates on the wealthy at the level at which tax revenue is maximized. The inevitable counter-argument will ask why the revenue-maximizing rate shouldn't apply to all earners. And the simple reason is that, where markets exist, it's only the mega-wealthy that can afford to go on "capital strike". Strictly speaking, if the labor market is efficient, a clerk at Wal-Mart earning $7 an hour leaving the labor force will cost the economy only the amount that she earns; the same logic that applies to the CEO applies to the rank and file. However, the unemployed clerk also won't be earning any income to pay for her needs. What this means is that, while the economy only values her up to the value of her salary, if she isn't working, she can't spend that nonexistent salary to support herself. As a result, she starves (or lives off of charity). The economy produces things, in short, because everyone needs things to live. But, for someone who has accumulated enough money to live on forever, assuming an efficient labor market, the only loss to society comes from the lost tax revenue. Otherwise... enjoy the leisure time, John Galt.
Now, I think the most interesting question here is the assumption involving efficient labor markets, and it's something that Krugman doesn't tackle in his post. It's no secret that inequality has exploded in the US-- the rich have gotten REALLY rich, and the poor and middle class have been left behind. In the 1960s, a CEO earned a few tens of times what an average employee earned-- maybe 20 or 30. Today, a CEO earns a few hundred times what an average employee earns-- 400 or so. This means one of two things must be true: either chief executives today are roughly 20 times more skilled now than they were 50 years ago, or the labor market is inefficient. And if the latter is true (which I think is a pretty safe assumption), the movement of income from labor to management and capital means one of two things is true. Either our compensation system used to redistribute wealth from management and capital to labor (in other words, CEOs and investors used to be wildly underpaid, and this subsidized rising wages for workers and the middle class; moreover, they also paid more in taxes then, so being upper-income must have been REALLY hard then...), or our compensation system now redistributes wealth from labor to management and capital.
I think the last statement rings most true, and the reasoning is pretty simple: workers productivity has been rising in the US pretty steadily. We're a technologically superior nation now to what we were when middle class wages stagnated, around 1980 (our communication systems are infinitely faster and more complex). We're a better-educated nation now than we were then. But somehow, in real terms, the gains have flowed almost entirely to the wealthiest 1%, and even more precisely to the wealthiest .1%. To believe that rising inequality is justified by market signals, you have to believe that the only Americans who have improved at what they do in about 30 years are executives, lawyers, doctors, and financiers. To me, that's a pretty hard case to make.
Where all this brings us is to Mitt Romney; both to his tax rate, and to his career at Bain Capital. The Democratic attacks on Romney's taxes have tended to go in the wrong direction. They've focused on how unfair it is that he has offshore accounts and imply that he's done something illegal. Let's be frank: I don't think there's any reason to believe that Romney's done anything illegal or untoward with his taxes. Like anyone, he's minimized his tax revenue under legal constraints. That's all well and good. But the question shouldn't be whether Romney pays an illegally low tax rate, but whether Romney and people like him, in the long run, pay a tax rate that's optimal from a social perspective. The answer to that, I think, is a clear no. Rather, I think our tax code provides a windfall to the mega-rich like Romney, and we should change that policy so that, instead of paying 15 or 20% of his income in taxes, Romney and people like him pay 30 or 35 or, God forbid, 40% of his income in taxes. If that sounds extravagant, it's useful to note that the implication of the efficient labor market postulate says the optimal top marginal tax rate for Romney and high earners like him is over 70% (the rate at which revenue is maximized). No one proposes that... but it should be in the discussion.
A last point concerns Romney's time at Bain Capital. Romney boasted of his work "creating jobs". The reality, though, is that private equity is not in the business of creating jobs. At its best, it's in the business of accelerating "creative destruction" by putting yesterday's companies out of business and paving the way for tomorrow's companies. But there's substantial evidence that what companies like Bain do in part is transfer wealth from labor to management and capital. Previously unionized labor is outsourced to contractors, whose workers receive lower pay and worse benefits. Tenured workers are laid off in favor of younger workers who are cheaper (there are market-based arguments for this, though there are also counter-arguments that workers start at these companies at sub-market wages due to the promise of advancement that used to come with making a career at a particular company). And the windfall goes to... managers, Bain executives, and Bain investors. Now, it's true that those investors aren't just rich folks-- they're pension funds and mutual funds and other retail investors. But it's equally true that a chunk of the gains represent a simple redistribution-- a transfer of wealth from workers to managers and investors that allows them to capture a chunk of society's wealth that is disproportionate to the value of their work.
So I think, in a narrow sense, there is class warfare. And, looking from the sidelines, I get the distinct sense that what we've got is a society in which the very richest are overcompensated, and are overcompensated at the expense of their workers. At the least, this makes a case for taxing them at a substantially higher rate, so that those workers can enjoy more of the benefits that they create, but which don't show up in their paychecks, and hasn't in decades. That, for me, is the way to think about how to make America the middle-class country we used to be, rather than one in which any and all social gains go toward making the rich super-rich instead of making the poor slightly less poor, or the middle class better off. That's not class warfare-- it's economics.
Sunday, July 8, 2012
Economists and health care
One of the things that strikes me most about the health care policy debate is just how little of it is focused on thinking about the actual policy implications of health care reform, and how much of it is rooted in misconceptions that people pass off as fact. A case in point, which I think is kind of relevant to the debate is a discussion I had with a co-worker last week. He brought up alternatives to the ACA, and I mentioned in passing that it drove me nuts that people talked about the solution to reform being "more markets". Which led him to respond that "virtually all" economists disagree. Of course, I called him out on this. The reality, of course, is that economists rather strongly lean the other direction, and have for years. Needless to say, when I brought up this being an issue in which the most prominent paper is almost 50 years old (the Kenneth Arrow piece), he dismissed it as "one paper by one economist" (never mind that it's still widely regarded as the pre-eminent paper in the field, and Arrow is a little more than "just some economist", but that's beside the point.
Although he wasn't much interested in hearing about 50 years of health care economics papers (and, let's be real, very few people are. Most people aren't big enough nerds and have better things to do than read academic papers for fun...), my colleague told me we'd "never agree" before we could start having a discussion. Fair enough. But he highlighted another flaw in the thinking of those who advocate for "market-oriented" approaches. When we got to talking about comparative-effectiveness research, he argued that, if this was an effective strategy, insurers would do it to cut payouts. But that's where his logic broke down. Just because doctors in a pay-for-procedure model have incentives in place to do more procedures, and do more expensive procedures rather than cheaper ones doesn't mean that they're always wrong to choose the more costly approach. While it might be that something like an X-Ray can catch 90% of what a CAT Scan can at a fraction of the cost, it doesn't follow that CAT Scans are redundant (this is entirely hypothetical; I hardly know the difference between the two, but this is assumed for argument's sake). Rather, there are good reasons why particular procedures are done at particular times, and why doctors can prefer one over the other. These vary not just based on the condition, but also based on the particular patient and their medical history. The reason doctors spend years in school and get paid big money is because they're highly skilled professionals, and their decisions can't be boiled down to a flowchart based on a few yes or no questions.
A big health insurer certainly has the breadth of patients to do comparative-effectiveness research. What it lacks is the capacity to monitor doctors that it oversees. It can't (and we don't want it to) tell doctors that they're doing superfluous procedures on patients simply because their view from 20,000 feet is insufficient to tell a particular patient what the best course of action is. As a result, insurers have controlled costs in other, even blunter ways. Along with rising premiums, driven by a lockstep rise in the cost of care, they use tools such as annual and lifetime caps to limit how much medical care they will cover. The problem with this, of course, is that there are plenty of patients who require more care than their annual or lifetime cap will permit. But doing away with these caps without broader just puts the health insurance industry out of business or puts health insurance out of reach for an even bigger chunk of Americans. If doctors are compensated for more expensive procedures, and insurers have to cover those procedures, there's really no incentive to cut costs. And then the problem just gets worse.
It should be clear that, as much as some people might rail against the government making health care decisions for people, allowing insurers to make health care decisions for people is even worse. This isn't to say that the insurance industry is "evil", per se-- just that, like any corporation, it's a profit-maximizing entity that makes more money when it pays for less. This creates a bit of a conflict if we accept that the social goal is to get people quality medical coverage. While cost control is really hard (as the prominent MIT health care economist Jonathan Gruber, who designed both RomneyCare and ObamaCare noted, it's not a problem that we'll ever solve, just one that we can hope to manage), we have some preliminary evidence that particular ways of paying for health care can cut costs without diminishing (and, in fact, while often enhancing) quality. The encouraging evidence is in comparing doctors who participate in the traditional pay-per-procedure model with those in integrated systems like the Mayo Clinic and Kaiser Permanente. The big difference in the latter model is that doctors, rather than being paid for procedures, are salaried. This means that, regardless of how much care they order, they are paid the same amount (likely with some incentives for good outcomes, but those are very different from incentives to do more procedures). Theoretically, such an approach would allow the provider itself to pressure the physicians to do fewer procedures, but in practice this doesn't seem to be the case. Doctors have an easier time ordering procedures and then finding out that insurance won't pay for some of them after the fact than being told by their employer that they shouldn't do procedure X, Y, or Z because it's too expensive. The former puts paying for care in someone else's (the patient's) court. The latter is an assault on their professional dignity.
I think, as a start, moving toward salaried physicians is a step in the right direction. By making the doctor strictly a doctor and not a businessperson providing medical services, this model strips away the incentive to overmedicate people and enables doctors to focus on treating patients.
Although he wasn't much interested in hearing about 50 years of health care economics papers (and, let's be real, very few people are. Most people aren't big enough nerds and have better things to do than read academic papers for fun...), my colleague told me we'd "never agree" before we could start having a discussion. Fair enough. But he highlighted another flaw in the thinking of those who advocate for "market-oriented" approaches. When we got to talking about comparative-effectiveness research, he argued that, if this was an effective strategy, insurers would do it to cut payouts. But that's where his logic broke down. Just because doctors in a pay-for-procedure model have incentives in place to do more procedures, and do more expensive procedures rather than cheaper ones doesn't mean that they're always wrong to choose the more costly approach. While it might be that something like an X-Ray can catch 90% of what a CAT Scan can at a fraction of the cost, it doesn't follow that CAT Scans are redundant (this is entirely hypothetical; I hardly know the difference between the two, but this is assumed for argument's sake). Rather, there are good reasons why particular procedures are done at particular times, and why doctors can prefer one over the other. These vary not just based on the condition, but also based on the particular patient and their medical history. The reason doctors spend years in school and get paid big money is because they're highly skilled professionals, and their decisions can't be boiled down to a flowchart based on a few yes or no questions.
A big health insurer certainly has the breadth of patients to do comparative-effectiveness research. What it lacks is the capacity to monitor doctors that it oversees. It can't (and we don't want it to) tell doctors that they're doing superfluous procedures on patients simply because their view from 20,000 feet is insufficient to tell a particular patient what the best course of action is. As a result, insurers have controlled costs in other, even blunter ways. Along with rising premiums, driven by a lockstep rise in the cost of care, they use tools such as annual and lifetime caps to limit how much medical care they will cover. The problem with this, of course, is that there are plenty of patients who require more care than their annual or lifetime cap will permit. But doing away with these caps without broader just puts the health insurance industry out of business or puts health insurance out of reach for an even bigger chunk of Americans. If doctors are compensated for more expensive procedures, and insurers have to cover those procedures, there's really no incentive to cut costs. And then the problem just gets worse.
It should be clear that, as much as some people might rail against the government making health care decisions for people, allowing insurers to make health care decisions for people is even worse. This isn't to say that the insurance industry is "evil", per se-- just that, like any corporation, it's a profit-maximizing entity that makes more money when it pays for less. This creates a bit of a conflict if we accept that the social goal is to get people quality medical coverage. While cost control is really hard (as the prominent MIT health care economist Jonathan Gruber, who designed both RomneyCare and ObamaCare noted, it's not a problem that we'll ever solve, just one that we can hope to manage), we have some preliminary evidence that particular ways of paying for health care can cut costs without diminishing (and, in fact, while often enhancing) quality. The encouraging evidence is in comparing doctors who participate in the traditional pay-per-procedure model with those in integrated systems like the Mayo Clinic and Kaiser Permanente. The big difference in the latter model is that doctors, rather than being paid for procedures, are salaried. This means that, regardless of how much care they order, they are paid the same amount (likely with some incentives for good outcomes, but those are very different from incentives to do more procedures). Theoretically, such an approach would allow the provider itself to pressure the physicians to do fewer procedures, but in practice this doesn't seem to be the case. Doctors have an easier time ordering procedures and then finding out that insurance won't pay for some of them after the fact than being told by their employer that they shouldn't do procedure X, Y, or Z because it's too expensive. The former puts paying for care in someone else's (the patient's) court. The latter is an assault on their professional dignity.
I think, as a start, moving toward salaried physicians is a step in the right direction. By making the doctor strictly a doctor and not a businessperson providing medical services, this model strips away the incentive to overmedicate people and enables doctors to focus on treating patients.
Wednesday, July 4, 2012
On "patient-centered" health care reform
Now that the furor over the Supreme Court's health care decision has died down, the inevitable attacks on the law have started with an eye toward the November election. Watching CNN, the TV ads from groups like Americans for Prosperity (the group chaired by one of the Koch Brothers to push right-wing positions) have focused on repealing the Affordable Care Act and replacing it with "patient-centered health care reform." The point of the contrast seems to be that the ACA is "government-centered health care reform." But push a little toward specifics, and what you learn is that, if you take these claims at their word (which there's substantial reason to doubt, but we can put that aside and give them the benefit of the doubt for now), this means focusing on patient choice. The idea is that we need to let people choose not only their doctors and hospitals (which they pretty much do now anyway), but also let them choose their insurance policies and which procedures they get done. And this is where the coherence of there plan falls apart altogether.
The key assumption here is that health care is an efficient market-- in other words, that people choosing their care will lead to the best care for the lowest prices. This assumption holds up great in many markets. When I go to the grocery store to buy bread, Brooks Brothers to buy a suit, Best Buy to get a new TV, or Sleepy's to buy a bed, I know what I'm looking for, and how much I'm willing to pay for it. I have very good information about the product-- I can inspect it, read consumer reports on it, try it out, and determine how much I am willing to pay for it. The health care market is a prime example of a market in which none of these characteristics are present. This observation isn't new-- as I've pointed out plenty of times before, Kenneth Arrow cited health care as a major failed market nearly 50 years ago. But it's useful to go back over why this is the case.
To start with, the vast majority of health care is not paid for at the point of delivery; it's paid for through insurance. What this means is that I don't know the true cost of a procedure that I have done because the health insurer is picking up the overwhelming majority of the bill. And insurance is absolutely necessary to pay for health care because health care costs are irregular and expensive when they are needed. What this means is that patients have no incentive to control costs, since they aren't footing the bill for procedures that they get. And, because doctors in the US are overwhelmingly compensated for doing procedures rather than getting results, the incentive on their end is to do more procedures that are more expensive rather than an efficient number of procedures that are necessary. Plenty of people on the right claim that the reason we consume so much medicine is because of greedy trial lawyers who gouge doctors. This is nonsense. Texas tried draconian tort reform. The number of lawsuits fell drastically. Health care costs didn't budge. Whether or not reforming the tort system is a good idea (I don't know enough to have strong feelings about it either way), it's certainly a proven failure as a cost-control strategy. The only plausible source of cost control in that scenario comes from... the health insurer. And, whatever you think of the health insurance industry (I'm not as hostile toward it as a lot of people are), putting an insurance company staffed by actuaries rather than doctors at the forefront of medical decision-making is a horrible idea, for self-evident reasons.
But even if we scrap the insurance system altogether and create something like health savings accounts where patients decide what procedures to get, "patient choice" is still a miserable idea. The reason is that the information asymmetry between buyer and seller is bigger in health care than in just about any other market. Imagine for a moment that you go to the doctor, and the doctor tells you that you have Condition X. The options for treating Condition X are A, B, and C, and the costs of those are D, E, and F. Do you have any way to verify anything that the doctor told you? If something doesn't work, do you have any clue if it didn't work because you got the wrong treatment, or because your body responded unpredictably? Heck, if a doctor cuts you open to remove a tumor, do you have any clue whether the doctor actually did anything besides sedate you, cut you open, and sew you back up? This should illuminate some things. First, medicine is a highly skilled profession. It takes a decade of schooling and preparation before you're ready to practice yourself. Being a hypochondriac who can read WebMD doesn't qualify someone to determine the proper course of treatment for themselves any more than watching Top Gun qualifies me to fly an F-16. The reality is that we walk into the doctor's office and entrust the doctor to make all crucial decisions for us, regardless of cost. And that's the way it should be; the doctor is in a position of confidence, and only the doctor can possibly know what's wrong with us and how we can make it better. Which is why the key to controlling costs is fixing skewed incentives for doctors (like paying them for procedures rather than outcomes). All "patient choice" serves to do is put people in a position to make decisions about themselves in an area in which they have absolutely no expertise. No lawyer would ever go to their client and ask which legal argument they'd rather pursue in the case; the client would tell them, "whichever one will win the case." In medicine, this is even more apparent; if I have a health problem, I'm woefully unqualified to tell my doctor what procedure I want done; the answer is always, "the one that will make me better." And if something goes wrong in the aftermath of a procedure, unless the doctor accidentally lopped off my arm fixing my wrist or cut off my head while doing heart surgery, there's no way for me to know that adverse effects later actually resulted from failure on the doctor's end, or failure of my body to respond to treatment. This is distinct from something like the market for beds, where the mattress collapsing a year after buying it is a pretty good sign that I bought a crappy bed, and the company was to blame.
Finally, medicine doesn't have the kind of choice consumer markets do. If I have a heart attack tomorrow, I won't tell the EMT that I don't want to be taken to St. Luke's because it stinks; I'll go to St. Luke's because it's around the corner. And, even for longer-term care, I have no clue how skilled a particular doctor is. I suppose there's a bit of value to looking at doctors' evaluations. The operative term is "a bit". 95% of those reviews focus on how long it took the receptionist to call them back, how attentive the doctor looked, and whether the doctor remembered their niece's name. The other 5% focus on how long the doctor spent in the room with them. This is about as useful as it sounds. If the consumer report for a TV tells me that it has poor image quality and a history of breaking after a year and a half, that's pretty good information. If broccoli at the grocery store is brown, it will probably taste like crap. A doctor's performance can only really be evaluated by... other doctors. Which means that we don't have any real meaningful choice over who's providing our care.
What all this points to is that this idea of "patient choice" as a centerpiece for effective, efficient care is completely nonsensical as a practical matter. The reality is that markets work great for most things. But that's because a functioning market requires particular conditions. Health care is a prime example of a market that is geared for failure. It isn't transparent, it has massive information asymmetries, and payment is separate from delivery. All of this makes the case for... either elimination of the market altogether (through the creation of a single payer, similar to what the UK and Canada have), or regulations that incentivize high-quality care at the lowest possible price, essentially creating the conditions in which the market WILL function well. Because I think markets are powerful tools under the proper conditions, I personally prefer the second option, with some tweaks. That second option is... the Affordable Care Act.
The key assumption here is that health care is an efficient market-- in other words, that people choosing their care will lead to the best care for the lowest prices. This assumption holds up great in many markets. When I go to the grocery store to buy bread, Brooks Brothers to buy a suit, Best Buy to get a new TV, or Sleepy's to buy a bed, I know what I'm looking for, and how much I'm willing to pay for it. I have very good information about the product-- I can inspect it, read consumer reports on it, try it out, and determine how much I am willing to pay for it. The health care market is a prime example of a market in which none of these characteristics are present. This observation isn't new-- as I've pointed out plenty of times before, Kenneth Arrow cited health care as a major failed market nearly 50 years ago. But it's useful to go back over why this is the case.
To start with, the vast majority of health care is not paid for at the point of delivery; it's paid for through insurance. What this means is that I don't know the true cost of a procedure that I have done because the health insurer is picking up the overwhelming majority of the bill. And insurance is absolutely necessary to pay for health care because health care costs are irregular and expensive when they are needed. What this means is that patients have no incentive to control costs, since they aren't footing the bill for procedures that they get. And, because doctors in the US are overwhelmingly compensated for doing procedures rather than getting results, the incentive on their end is to do more procedures that are more expensive rather than an efficient number of procedures that are necessary. Plenty of people on the right claim that the reason we consume so much medicine is because of greedy trial lawyers who gouge doctors. This is nonsense. Texas tried draconian tort reform. The number of lawsuits fell drastically. Health care costs didn't budge. Whether or not reforming the tort system is a good idea (I don't know enough to have strong feelings about it either way), it's certainly a proven failure as a cost-control strategy. The only plausible source of cost control in that scenario comes from... the health insurer. And, whatever you think of the health insurance industry (I'm not as hostile toward it as a lot of people are), putting an insurance company staffed by actuaries rather than doctors at the forefront of medical decision-making is a horrible idea, for self-evident reasons.
But even if we scrap the insurance system altogether and create something like health savings accounts where patients decide what procedures to get, "patient choice" is still a miserable idea. The reason is that the information asymmetry between buyer and seller is bigger in health care than in just about any other market. Imagine for a moment that you go to the doctor, and the doctor tells you that you have Condition X. The options for treating Condition X are A, B, and C, and the costs of those are D, E, and F. Do you have any way to verify anything that the doctor told you? If something doesn't work, do you have any clue if it didn't work because you got the wrong treatment, or because your body responded unpredictably? Heck, if a doctor cuts you open to remove a tumor, do you have any clue whether the doctor actually did anything besides sedate you, cut you open, and sew you back up? This should illuminate some things. First, medicine is a highly skilled profession. It takes a decade of schooling and preparation before you're ready to practice yourself. Being a hypochondriac who can read WebMD doesn't qualify someone to determine the proper course of treatment for themselves any more than watching Top Gun qualifies me to fly an F-16. The reality is that we walk into the doctor's office and entrust the doctor to make all crucial decisions for us, regardless of cost. And that's the way it should be; the doctor is in a position of confidence, and only the doctor can possibly know what's wrong with us and how we can make it better. Which is why the key to controlling costs is fixing skewed incentives for doctors (like paying them for procedures rather than outcomes). All "patient choice" serves to do is put people in a position to make decisions about themselves in an area in which they have absolutely no expertise. No lawyer would ever go to their client and ask which legal argument they'd rather pursue in the case; the client would tell them, "whichever one will win the case." In medicine, this is even more apparent; if I have a health problem, I'm woefully unqualified to tell my doctor what procedure I want done; the answer is always, "the one that will make me better." And if something goes wrong in the aftermath of a procedure, unless the doctor accidentally lopped off my arm fixing my wrist or cut off my head while doing heart surgery, there's no way for me to know that adverse effects later actually resulted from failure on the doctor's end, or failure of my body to respond to treatment. This is distinct from something like the market for beds, where the mattress collapsing a year after buying it is a pretty good sign that I bought a crappy bed, and the company was to blame.
Finally, medicine doesn't have the kind of choice consumer markets do. If I have a heart attack tomorrow, I won't tell the EMT that I don't want to be taken to St. Luke's because it stinks; I'll go to St. Luke's because it's around the corner. And, even for longer-term care, I have no clue how skilled a particular doctor is. I suppose there's a bit of value to looking at doctors' evaluations. The operative term is "a bit". 95% of those reviews focus on how long it took the receptionist to call them back, how attentive the doctor looked, and whether the doctor remembered their niece's name. The other 5% focus on how long the doctor spent in the room with them. This is about as useful as it sounds. If the consumer report for a TV tells me that it has poor image quality and a history of breaking after a year and a half, that's pretty good information. If broccoli at the grocery store is brown, it will probably taste like crap. A doctor's performance can only really be evaluated by... other doctors. Which means that we don't have any real meaningful choice over who's providing our care.
What all this points to is that this idea of "patient choice" as a centerpiece for effective, efficient care is completely nonsensical as a practical matter. The reality is that markets work great for most things. But that's because a functioning market requires particular conditions. Health care is a prime example of a market that is geared for failure. It isn't transparent, it has massive information asymmetries, and payment is separate from delivery. All of this makes the case for... either elimination of the market altogether (through the creation of a single payer, similar to what the UK and Canada have), or regulations that incentivize high-quality care at the lowest possible price, essentially creating the conditions in which the market WILL function well. Because I think markets are powerful tools under the proper conditions, I personally prefer the second option, with some tweaks. That second option is... the Affordable Care Act.
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