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.
Monday, July 9, 2012
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.
Friday, June 29, 2012
Is the healthcare law good policy?
Now that the Supreme Court's handed down its decision on the health care law and decided that it didn't have the heart to strike down the biggest piece of domestic policy legislation since the Great Society, the debate should shift to the crux of the issue-- whether the Affordable Care Act is actually good policy. Before I get into the crux of the problem, the main piece of outrage from the right seems to be that President Obama lied when he declared that the shared responsibility payment (penalty) wasn't a tax. Which is a completely inane, foolish talking point. Because whether the penalty is a tax or a penalty or a payment or a gift is completely beyond the point. Everyone knew that there was a payment attached to those who forego getting insurance. Everyone knew what that payment was-- that it was in the bill, and the amount attached to it. What you CALL the payment is completely superfluous. It's like someone saying that they don't like fruit but they do like tomatoes, and then being told that tomatoes are a fruit. Whether you call a tomato a fruit or a vegetable is irrelevant so long as you know exactly what the tomato is. In evaluating that argument, Chief Justice Roberts did what every lawyer is trained to do-- he looked at what makes a payment LEGALLY a tax, determined that the payment fit those criteria (he cited the manner in which it was collected, its size, and whether there was a scienter requirement, among other characteristics, to distinguish it from a penalty), and called it a tax. So legally, it's a tax. But that doesn't change what it is-- it's always been the same piece of policy; all that's changed is the label.
Now on to the crux of the issue. The proper question to ask isn't whether the ACA is perfect or whether it's the Platonic ideal of what a health care system should look like-- legislation isn't made in a vacuum; it's a messy process that involves coalition-building that makes for good politics but not great policy. And a lot of times the perfect is the worst enemy of the good, in the sense that real life doesn't look much like the ideal. If you put together the 50 best health care economists and managers and asked them to design an ideal health care system, implementing that system from the ground up would be a nightmare. It would require you to displace tens of constituencies, create tens of others from the ground up, all while continuing to provide essential services to essentially the entire population. The transition, in short, would be a nightmare. So an improved health care system almost has to be built on the shoulders of the one we have; useless appendages should be removed, parts that don't work should be phased out, and new structures should be integrated with existing ones.
So the question now is whether we would be better off from a social policy perspective with the health care law or without it. I think the answer is that this is clearly better than both doing nothing, and than anything that Republicans have proposed to date (I'm somewhat conflicted over whether this is better policy than a single-payer system, but no one is proposing that). The best way to determine that the bill is good policy is to look at the arguments that are made against the policy. The attacks on the health care bill are, to put it simply, a mix of misleading and mind-numbingly stupid. I'll break them down into a few.
First, the argument is made that the bill is "too long" and "too complex" and "we should do health care reform piece by piece". These are all repackaged versions of the same argument. The first is made by the Tea Party types, while the last is made by the faux-sophisticated George Will types. It's a terrible argument in either case. Plainly, yes, the ACA is long. Yes, the ACA is complicated. There's a good reason for that. The US health care system is big. The US health care system is complicated. The US health care system has thousands of moving parts, hundreds of constituencies, hundreds of millions of patients, and trillions of dollars (15% of GDP in 2008; that comes out to over $2 TRILLION). A 30-page bill or a 100-page bill that tries to tackle a $2 trillion problem isn't going to scratch the surface. And the claim that this is because it should be done piecemeal is equally inane. The health care system isn't $2 trillion worth of disparate parts-- the pieces are all interconnected; they reinforce each other and come into conflict in thousands of different loci. Insurance intersects with pharmaceuticals and health care providers and hospitals... and that's just the beginning. It's a complex system. Fixing one piece reverberates in other places. A holistic system needs a holistic fix (precisely because the way the system is constructed now is rife with inefficiencies that only a holistic fix can address). This bleeds directly into the next argument.
Second, another common line of attack says that most people don't support the ACA. This is true, but in a very misleading way. Strictly speaking, most people say they don't support the ACA. But break it down further, and they contradict themselves. By even bigger margins, most people DO support just about all of the ACA's individual provisions. The least popular of those provisions? The mandate. Now, this is where the "too long" argument really collapses. Conservatives can claim they want it done piece by piece. So let's say Congress wants to pass two overwhelmingly popular provisions from the ACA-- the requirement that people with pre-existing conditions be able to obtain insurance without paying exorbitant rates. People love that, and with good reason. Now let's imagine Congress enacts that on its own. Tomorrow, health insurance premiums will skyrocket. People who don't consume health care services regularly will drop out of the market en masse because there's no reason to carry insurance when... you can just buy insurance once you get sick. Which defeats the entire point of insurance in the first place. In an insurance policy, those who don't suffer from the insured event subsidize those who do. When people only carry insurance when they're sick, insurers have to charge exorbitant rates that no one can afford. The only ones carrying insurance are the ones who need it. This concept isn't new-- it's been pretty well-documented ever since Nobel Prize-winning economist George Akerlof published his famous article on the market for lemons (lemons in the figurative rather than literal sense here). Goodbye, health insurance. So how do we make sure that people don't hold off on buying insurance until they need treatment? Well, by requiring them to carry insurance. That or the government insuring everyone out of tax revenue. Which means single payer. So the real choice isn't all these provisions everyone likes and not a mandate-- it's a mandate and all these provisions everyone likes. The brunt of the Republican attack is comprised of horrific mischaracterizations of the bill (death panels! skyrocketing costs!) and populist appeals.
Third, the argument goes that government involvement in the sector stifles the free market. Which is an ironic argument because those who are most vocal about free markets are always those who have no idea how a free market works. Economists, of course, have recognized that health care is a prime example of market failure for a good half century, ever since another Nobelist, Kenneth Arrow, published his seminal paper. In a functional market, scarce goods are allocated to those who can purchase them through the pricing mechanism. Buyers and sellers with perfect information bargain until an efficient price level is reached for products. Now, this perfect market is almost never achieved. But in plenty of cases, it's close enough. The couch and television markets come close. Health care doesn't approach close.
Those assumptions are so far off base that the entire suggestion that what we need in health care is more markets is laughable. For one, it's not a market that's allocating a scarce resource according to demand. The reason is simple-- we believe that, in a decent country, we don't let people lying on the street die of their injuries or illnesses. We treat them first and ask questions later. There's a pretty good reason we can reach the police, the fire department, or the EMTs when we call 911-- it's because we believe that we're all entitled to those services. Two of those services are provided municipally or by volunteers. The other is more complex. Since health care is expensive and is provided to everyone, the mechanism for allocating it isn't who can pay the most for a service-- it's how to provide that service effectively and efficiently to as many people as possible. Preferably, everyone. We don't believe that everyone is entitled to a couch. We do believe that everyone is entitled to health care when they're hit by a car. For another, health care is riddled with more asymmetries of information than just about any market. As a third Nobelist, Joseph Stiglitz, points out in his seminal 1976 paper with Michael Rothschild, even small information asymmetries can throw markets off of equilibrium for extended periods. And no relationship is more asymmetric than the doctor-patient relationship, in which patients not only have no clue whether what the doctor is doing is proper, but also cannot know in hindsight whether doctors mitigated or exacerbated their problems. Consequently, shopping among doctors looks nothing like shopping among furniture or electronics stores-- it's an exercise in futility that the market is incapable of correcting.
What that leaves us with is a system with two major problems-- skyrocketing costs and tens of millions of uninsured whose treatment is subsidized by those who are insured. These problems are somewhat related, but rather distinct. If the right has a response to the problem of the uninsured, they're doing a great job of keeping it secret-- I haven't read a single remotely plausible argument for how the uninsured can be covered. And "unleash the market" is not a mechanism for putting the uninsured to work, for reasons I pointed out in the last paragraph. The cost argument is even less persuasive. At heart, a major reason we pay too much for health care is the incentives built into the health care system. Doctors are largely paid for doing procedures. And the more the procedure costs, the more they get paid. This results in lots of expensive procedures, but not much in the way of good results.
The inevitable claim is that this is all because of lawyers. The claim is that all we need to control costs is tort reform-- if patients can't frivolously sue doctors, doctors won't practice defensive medicine and overmedicate people and costs will plummet. Never mind that Texas passed a draconian tort reform law in the early 2000s. The result was... a rapid decline in lawsuits. And no change in skyrocketing health care costs. All of this is detailed in Atul Gawande's brilliant New Yorker piece from three years ago. The reason, of course, is pretty simple. Contrary to the myth, winning a medical malpractice suit isn't easy-- juries aren't desperate to make doctors pay out of their noses, and lawyers representing plaintiffs in malpractice claims are hardly the most popular folks in the world. And, since tort lawyers work on contingency anyway, odds are they aren't going to represent your pissed-off friend Chuck who thinks he'll extort 7 figures from the doctor's malpractice insurance with a phony claim he'll sell to a jury. This isn't hard to figure out if you think about it. If doctors are paid more for doing more expensive procedures, and they make a profit on each procedure they do, they'll do a whole lot of procedures, whether they are, strictly speaking, necessary or not. And the evidence supports that-- integrated service providers like the Mayo Clinic and Kaiser, which keep doctors on salary, not only control costs many times better than the traditional pay-for-service systems: they also get better results.
Luckily, the ACA takes steps to improve information-gathering about patients and procedures. If we have a good idea of what works, we can encourage doctors to do what works instead of doing more procedures. Following convention is already a complete defense to medical malpractice claims in court-- the trick is to make sure that the convention is actually the most effective way to provide a particular service. That requires information-gathering and the right incentives. The ACA is a good step in the right direction in that regard.
So what we've got is a complex bill that makes an effort to tackle complex issues of coverage and cost. And on the other side, we've got... tort reform and something about unleashing the free market into a failed market. The choice... isn't very close. And doing nothing isn't an option either-- our system as is is broken. Our costs are rising in an unsustainable way, and we still don't get very good results. What this should tell us is that, while we should undoubtedly make efforts to improve our health care system, the ACA is a positive step, and repeal would be a disaster. Now, I'm not going to come out and say that the call to "replace" it is wrong-- I'm always open to better suggestions for our health care system. But replacing comprehensive health care reform with... a punitive attack on tort lawyers and nothing else is dangerously harebrained. So if you believe the US should be a country that doesn't leave its wounded citizens to die on the street, and you believe in controlling health care costs, the ACA is a big victory for you.
Now on to the crux of the issue. The proper question to ask isn't whether the ACA is perfect or whether it's the Platonic ideal of what a health care system should look like-- legislation isn't made in a vacuum; it's a messy process that involves coalition-building that makes for good politics but not great policy. And a lot of times the perfect is the worst enemy of the good, in the sense that real life doesn't look much like the ideal. If you put together the 50 best health care economists and managers and asked them to design an ideal health care system, implementing that system from the ground up would be a nightmare. It would require you to displace tens of constituencies, create tens of others from the ground up, all while continuing to provide essential services to essentially the entire population. The transition, in short, would be a nightmare. So an improved health care system almost has to be built on the shoulders of the one we have; useless appendages should be removed, parts that don't work should be phased out, and new structures should be integrated with existing ones.
So the question now is whether we would be better off from a social policy perspective with the health care law or without it. I think the answer is that this is clearly better than both doing nothing, and than anything that Republicans have proposed to date (I'm somewhat conflicted over whether this is better policy than a single-payer system, but no one is proposing that). The best way to determine that the bill is good policy is to look at the arguments that are made against the policy. The attacks on the health care bill are, to put it simply, a mix of misleading and mind-numbingly stupid. I'll break them down into a few.
First, the argument is made that the bill is "too long" and "too complex" and "we should do health care reform piece by piece". These are all repackaged versions of the same argument. The first is made by the Tea Party types, while the last is made by the faux-sophisticated George Will types. It's a terrible argument in either case. Plainly, yes, the ACA is long. Yes, the ACA is complicated. There's a good reason for that. The US health care system is big. The US health care system is complicated. The US health care system has thousands of moving parts, hundreds of constituencies, hundreds of millions of patients, and trillions of dollars (15% of GDP in 2008; that comes out to over $2 TRILLION). A 30-page bill or a 100-page bill that tries to tackle a $2 trillion problem isn't going to scratch the surface. And the claim that this is because it should be done piecemeal is equally inane. The health care system isn't $2 trillion worth of disparate parts-- the pieces are all interconnected; they reinforce each other and come into conflict in thousands of different loci. Insurance intersects with pharmaceuticals and health care providers and hospitals... and that's just the beginning. It's a complex system. Fixing one piece reverberates in other places. A holistic system needs a holistic fix (precisely because the way the system is constructed now is rife with inefficiencies that only a holistic fix can address). This bleeds directly into the next argument.
Second, another common line of attack says that most people don't support the ACA. This is true, but in a very misleading way. Strictly speaking, most people say they don't support the ACA. But break it down further, and they contradict themselves. By even bigger margins, most people DO support just about all of the ACA's individual provisions. The least popular of those provisions? The mandate. Now, this is where the "too long" argument really collapses. Conservatives can claim they want it done piece by piece. So let's say Congress wants to pass two overwhelmingly popular provisions from the ACA-- the requirement that people with pre-existing conditions be able to obtain insurance without paying exorbitant rates. People love that, and with good reason. Now let's imagine Congress enacts that on its own. Tomorrow, health insurance premiums will skyrocket. People who don't consume health care services regularly will drop out of the market en masse because there's no reason to carry insurance when... you can just buy insurance once you get sick. Which defeats the entire point of insurance in the first place. In an insurance policy, those who don't suffer from the insured event subsidize those who do. When people only carry insurance when they're sick, insurers have to charge exorbitant rates that no one can afford. The only ones carrying insurance are the ones who need it. This concept isn't new-- it's been pretty well-documented ever since Nobel Prize-winning economist George Akerlof published his famous article on the market for lemons (lemons in the figurative rather than literal sense here). Goodbye, health insurance. So how do we make sure that people don't hold off on buying insurance until they need treatment? Well, by requiring them to carry insurance. That or the government insuring everyone out of tax revenue. Which means single payer. So the real choice isn't all these provisions everyone likes and not a mandate-- it's a mandate and all these provisions everyone likes. The brunt of the Republican attack is comprised of horrific mischaracterizations of the bill (death panels! skyrocketing costs!) and populist appeals.
Third, the argument goes that government involvement in the sector stifles the free market. Which is an ironic argument because those who are most vocal about free markets are always those who have no idea how a free market works. Economists, of course, have recognized that health care is a prime example of market failure for a good half century, ever since another Nobelist, Kenneth Arrow, published his seminal paper. In a functional market, scarce goods are allocated to those who can purchase them through the pricing mechanism. Buyers and sellers with perfect information bargain until an efficient price level is reached for products. Now, this perfect market is almost never achieved. But in plenty of cases, it's close enough. The couch and television markets come close. Health care doesn't approach close.
Those assumptions are so far off base that the entire suggestion that what we need in health care is more markets is laughable. For one, it's not a market that's allocating a scarce resource according to demand. The reason is simple-- we believe that, in a decent country, we don't let people lying on the street die of their injuries or illnesses. We treat them first and ask questions later. There's a pretty good reason we can reach the police, the fire department, or the EMTs when we call 911-- it's because we believe that we're all entitled to those services. Two of those services are provided municipally or by volunteers. The other is more complex. Since health care is expensive and is provided to everyone, the mechanism for allocating it isn't who can pay the most for a service-- it's how to provide that service effectively and efficiently to as many people as possible. Preferably, everyone. We don't believe that everyone is entitled to a couch. We do believe that everyone is entitled to health care when they're hit by a car. For another, health care is riddled with more asymmetries of information than just about any market. As a third Nobelist, Joseph Stiglitz, points out in his seminal 1976 paper with Michael Rothschild, even small information asymmetries can throw markets off of equilibrium for extended periods. And no relationship is more asymmetric than the doctor-patient relationship, in which patients not only have no clue whether what the doctor is doing is proper, but also cannot know in hindsight whether doctors mitigated or exacerbated their problems. Consequently, shopping among doctors looks nothing like shopping among furniture or electronics stores-- it's an exercise in futility that the market is incapable of correcting.
What that leaves us with is a system with two major problems-- skyrocketing costs and tens of millions of uninsured whose treatment is subsidized by those who are insured. These problems are somewhat related, but rather distinct. If the right has a response to the problem of the uninsured, they're doing a great job of keeping it secret-- I haven't read a single remotely plausible argument for how the uninsured can be covered. And "unleash the market" is not a mechanism for putting the uninsured to work, for reasons I pointed out in the last paragraph. The cost argument is even less persuasive. At heart, a major reason we pay too much for health care is the incentives built into the health care system. Doctors are largely paid for doing procedures. And the more the procedure costs, the more they get paid. This results in lots of expensive procedures, but not much in the way of good results.
The inevitable claim is that this is all because of lawyers. The claim is that all we need to control costs is tort reform-- if patients can't frivolously sue doctors, doctors won't practice defensive medicine and overmedicate people and costs will plummet. Never mind that Texas passed a draconian tort reform law in the early 2000s. The result was... a rapid decline in lawsuits. And no change in skyrocketing health care costs. All of this is detailed in Atul Gawande's brilliant New Yorker piece from three years ago. The reason, of course, is pretty simple. Contrary to the myth, winning a medical malpractice suit isn't easy-- juries aren't desperate to make doctors pay out of their noses, and lawyers representing plaintiffs in malpractice claims are hardly the most popular folks in the world. And, since tort lawyers work on contingency anyway, odds are they aren't going to represent your pissed-off friend Chuck who thinks he'll extort 7 figures from the doctor's malpractice insurance with a phony claim he'll sell to a jury. This isn't hard to figure out if you think about it. If doctors are paid more for doing more expensive procedures, and they make a profit on each procedure they do, they'll do a whole lot of procedures, whether they are, strictly speaking, necessary or not. And the evidence supports that-- integrated service providers like the Mayo Clinic and Kaiser, which keep doctors on salary, not only control costs many times better than the traditional pay-for-service systems: they also get better results.
Luckily, the ACA takes steps to improve information-gathering about patients and procedures. If we have a good idea of what works, we can encourage doctors to do what works instead of doing more procedures. Following convention is already a complete defense to medical malpractice claims in court-- the trick is to make sure that the convention is actually the most effective way to provide a particular service. That requires information-gathering and the right incentives. The ACA is a good step in the right direction in that regard.
So what we've got is a complex bill that makes an effort to tackle complex issues of coverage and cost. And on the other side, we've got... tort reform and something about unleashing the free market into a failed market. The choice... isn't very close. And doing nothing isn't an option either-- our system as is is broken. Our costs are rising in an unsustainable way, and we still don't get very good results. What this should tell us is that, while we should undoubtedly make efforts to improve our health care system, the ACA is a positive step, and repeal would be a disaster. Now, I'm not going to come out and say that the call to "replace" it is wrong-- I'm always open to better suggestions for our health care system. But replacing comprehensive health care reform with... a punitive attack on tort lawyers and nothing else is dangerously harebrained. So if you believe the US should be a country that doesn't leave its wounded citizens to die on the street, and you believe in controlling health care costs, the ACA is a big victory for you.
Thursday, June 28, 2012
The Supreme Court does health care
Today, the Supreme Court issued its long-awaited decision on health care. The opinions, combined, added up to almost 200 pages, which I finally managed to get through. So a few smaller thoughts, and a big thought (on the controlling opinion by Chief Justice Roberts). First the smaller issues:
First, it seems quite clear that Roberts changed his mind at the last possible moment (that or Justice Scalia's hired some exceptionally sloppy clerks this term)-- Scalia's dissent reads like a majority decision (complete with reference to "Justice Ginsburg's dissent" and "the dissent"; Ginsburg did dissent in part, but as is, her partial dissent was one of three dissents (Scalia's and Justice Thomas's being the others). As is, he left in wording that makes it appear that Scalia had the rug pulled out from under him by Justice Roberts.
Second, Justice Ginsburg's concurrence is a gem. Probably the best opinion of hers I've read-- the argument is airtight, and she pauses to take what seems like a pretty thinly veiled shot across her friend Scalia's bow, pointing out that his dissent just kind of contradicts his own jurisprudence when she writes:
The Necessary and Proper Clause “empowers Congress to enact laws in effectuation of its [commerce] powe[r] that are not within its authority to enact in isolation.” Raich, 545 U. S., at 39 (Scalia, J., concurring in judgment). Hence, “[a] complex regulatory program . . . can survive a Commerce Clause challenge without a showing that every single facet of the program is independently and directly related to a valid congressional goal.” Indiana, 452 U. S., at 329, n. 17. “It is enough that the challenged provisions are an integral part of the regulatory program and that the regulatory scheme when considered as a whole satisfies this test.” Ibid. (collecting cases). See also Raich, 545 U. S., at 24–25 (A challenged statutory provision fits within Congress’ commerce authority if it is an “essential par[t] of a larger regulation of economic activity,” such that, in the absence of the provision, “the regulatory scheme could be undercut.” (quoting Lopez, 514 U. S., at 561)); Raich, 545 U. S., at 37 (Scalia, J., concurring in judgment) (“Congress may regulate even noneconomic local activity if that regulation is a necessary part of a more general regulation of interstate commerce. The relevant question is simply whether the means chosen are ‘reasonably adapted’ to the attainment of a legitimate end under the commerce power.”
Third, Justice Thomas writes another classic dissent. It covers all of 5 sentences. Not pages, sentences. He cites three different opinions. Two are concurrences. One is a dissent. Meaning that none of the three is controlling. All are written by... Justice Thomas. You kind of have to admire someone who doesn't even pretend to care what the legal profession thinks. And no one cares less than Justice Thomas.
But my major thought, after reading the opinion, is that it's a plainly mediocre piece of legal reasoning, notwithstanding the Right's rush to brand Roberts a regular Judas and the Left's coronation, I just wasn't impressed with the opinion itself.. The way Roberts comes out on the Medicaid issue is troubling, and needs another post to be fleshed out, but, on the mandate, Ginsburg more or less eviscerates his case on the precedent. Roberts trots out the tired line that people like George Will (who walks and talks like a smart person until you read what he actually says) adhere to-- that buying insurance is an act of commerce and someone choosing not to buy insurance is not.
This distinction is, for practical purposes, nonsense. Here's why. It's true that buying insurance is an act of commerce. But carrying insurance is a commercial activity. Congress plainly has the power to regulate insurance that I already carry under the Commerce Clause. The missing piece is that, even if you haven't bought insurance, you're carrying health insurance all the time, whether you pay for it or not. This is because not having insurance is a risk transfer from you to society. Your health care is constantly being insured by everyone else. And, even if you don't use any health care services for 5 years, you're STILL carrying health insurance because you constantly carry that insurance, in the same way that you still have car insurance even if you go 5 years without crashing your car. The fact that the risk of injury is constantly transferred to others means that, unless your net worth is into 8 figures, you're constantly transferring risk to others, and so are carrying insurance. And regulation of who bears that risk is pretty clearly a regulation of interstate commerce.
It may well be that health care is unique in this regard-- the tired broccoli non-sequitur... is still a non-sequitur. Participation is voluntary, predictable, and affordable and, more importantly, no one is compelled to feed people who are starving. It's a good thing to buy a starving person on the street a cheeseburger. It's compulsory for a hospital to treat someone who's been hit by a car, whether they're Bill Gates or have $6.50 to their name. That's not the case in any other market I can think of.
Now, this could all be meaningless going forward-- while Roberts has drawn a pretty sharp line in the sand on the commerce clause, there aren't any other markets I can think of in which the government might seek to mandate purchase of a product because everyone is involved in the market, and the market is one in which participation is both irregular and expensive. But then the founders couldn't have contemplated the health care market turning into the albatross it's become, so the precedent is troublesome for future generations in that regard.
But I'll take the outcome. For public policy reasons, partisan score-keeping aside, a bill that seeks to make health care affordable for everyone, limit costs, and mitigate distortions in the health care market isn't just acceptable under the Constitution-- it's also a morally good thing.
Sunday, May 13, 2012
When we do the same thing and expect a different result... (Financial Regulation edition)
There's a phrase that rather perfectly describes last week's big news on Wall Street. I think I heard it for the first time on a Method Man track, but I think the origin might be Stephen King's book Dreamcatcher (which is about aliens that take over people's minds by giving them explosive diarrhea; I'm dead serious). The phrase is SSDD (because I don't like to curse on here, you can Google it).
JPMorgan's massive basis trade blow-up that's cost it $2 billion (and possibly counting) has reopened the debate about the Volcker Rule and Too Big To Fail at the big banks. Of course, massive trading losses are nothing new. A rogue trader at Soc Gen lost that bank a few billion. Another rogue trader at UBS lost the big Swiss bank $2 billion. A big directional bet on subprime lost Morgan Stanley around $9 billion during the financial crisis. And that's just in the last few years. The notable thing about this loss isn't necessarily its size ($2 billion for a bank the size of JPMorgan is a lot, but it's not life-threatening) or its nature (this wasn't a rogue trader; it was the investment office) or even its legality (details have been scarce, but it appears the trade was compliant with the regulations in place to this point). What's really interesting here is it happened at JPMorgan, the banks that, under the leadership of CEO Jamie Dimon, has been leading the charge against financial regulation in the aftermath of the financial crisis.
The crux of Dimon's argument has been, essentially, that further regulation is unnecessary. He proudly points to his own bank as a model of fantastic management, and began claiming that more regulation was unnecessary the instant the markets stabilized in the aftermath of the panic. This loss blows a big hole in his argument. Now, I've never really gotten the obsession with Jamie Dimon in the press and among pundits and politicians. Sure, JPMorgan came through the crisis better than most of the other big banks (mostly because it shrank its subprime portfolio in 2006 rather than waiting for the markets to sound the alarm), but that's always smelled more like dumb luck to me than great leadership. In all honesty, I haven't seen or read any great insight from Dimon, or seen any evidence that he's anything special as a leader-- most of the hype seems to center on him looking like a leader and being outspoken (where Lloyd Blankfein is short and looks like one of those bald aliens on Star Trek with the giant ears and wrinkled foreheads).
The details on the trade are fuzzy. From what I can gather, the trade was in JPMorgan's derivative book, and their claim is that it was a "flattener" meant to hedge their overall credit portfolio (the bet was that short and long yields would "flatten", meaning shorter-duration bond yields would converge with longer-duration bond yields; generally, a flat yield curve is a bad sign). But it looks like someone lost control of the trade and ended up with massive next exposure in one direction that went bad (at least that's the benign version; it could well have been an outright bet).
Of course, Dimon is trying to minimize the impact of the trade-- he claims the press and politicians are "making a mountain out of a molehill" and it's not that big a deal. And while he's right that the loss won't sink his firm, the fact is that $2 billion in a relatively calm market is a BIG loss. The same kind of trade in a market like the one we had in the second half of 2008 would have put his company on the brink. And that just makes the case for better oversight clear. While I don't necessarily think that splitting up market-making and commercial banking is the solution, I do think that size is a problem. And JPMorgan is enormous. If this loss had been bigger, or even if it had happened in a more turbulent market, the bank would have been in line for a bailout. And it would have gotten it because a bank with around $2.3 trillion in assets like JPMorgan can't fail without sending the economy off a cliff after it. Lehman Brothers, which was about 1/4 the size of JPMorgan, less interconnected, and had no depositors, sparked a panic when it failed in September 2008. JPMorgan is a few orders of magnitude bigger.
The point this makes isn't very complicated-- it's that, when someone like Jamie Dimon comes out and says that banks don't need more regulation because people like him are too good at risk management to make bad judgments that could require public help, the response should be, "Baloney".
Thursday, May 10, 2012
European elections (a little late)
For the last month or so, I've been on an exam-mandated posting break. The NBA playoffs will warrant a post sometime soon, but 1) all the injuries in the first round still have me a little depressed, and 2) that post will take more thought and research than this one. So, European elections. The most recent round of elections had what appears to onlookers to be a leftward tilt-- the Socialist Party won the presidency in France for the first time since 1995, and the leftist Syriza coalition has the opportunity to form a government in Greece now that the center-right New Democracy party failed to secure a coalition after willing a tiny plurality of the vote.
Much of the American left sees this as an affirmation of their principles. I don't think this is right. I don't think Europeans are voting along ideological lines the way most Americans do-- I think at this point, they're voting to reject the ridiculous austerity push that's destroying Europe. What that means, I think, is that Europeans aren't voting for a bigger welfare state, for higher corporate taxes, and for a later retirement age. There's already a pretty robust progressive consensus in literally all of those countries on universal health care, income security, and other issues that seem to divide Americans. Rather, their vision for the short run (which, as Larry Summers has poignantly pointed out, can quickly crystallize into the long run if economies stay depressed long enough) differs dramatically from the proven failure that the governing parties provided.
A lot of fearmongering in the US comes, in particular, from those opposed to Hollande. In particular, his proposal to hike marginal tax rates on millionaires to 75% is seen as class warfare. Now, the rhetoric of class warfare is silly, but a 75% top rate is almost certainly bad economics (it might make sense, say, for incomes over $10 million, but for all but the mega-rich, a marginal tax of 75% is probably not good policy). But, as bad policy goes, I don't think it's catastrophic, even if it were enacted (which I don't think it will be; to me it smells like election-year pandering). But in the US, there's a strong reaction to Hollande-- the political left sees his election as a vindication of activist government, and the right sees it as a disaster-- spoiled constituents turning to an irresponsible leftist promising a free lunch.
But, for me, the election is about neither; it's a typical election-year play, just like the 2008 election was in the US. In short, when things are improving, incumbents get re-elected. When they're deteriorating, incumbents get tossed out. And in Europe, the situation is certainly deteriorating. The root of that deterioration is the austerity imposed on Europe by the Merkel-Sarkozy axis in Germany and France; hopefully the French public's election of Hollande represents the beginning of the end for that destructive alliance.
For the Germans especially, the desire is to see the problems in southern Europe and Ireland as a morality play; the southern Europeans were irresponsible, and they need to pay for their irresponsibility with austerity. There's a "necessary period of suffering" to restore the economies. That's almost complete baloney. The "almost" is in there because irresponsibility was the story in Greece. But, as I've probably mentioned before, Spain had a substantially smaller debt burden than Germany, and a budget surplus in 2007. Exactly what "irresponsibility" are the Spanish supposed to pay for? Ireland is a similar story-- it had an even smaller debt burden than Spain, and very little public debt. Then the crisis struck. Ireland's played the good soldier and endured the bleeding treatment prescribed by Dr. Merkel. The result has been... nothing resembling a recovery (no matter what Europe's wise men might proclaim, austerity in Ireland has been rewarded with... high unemployment and terrible suffering. The market haven't expressed "confidence" in the Irish either-- their borrowing costs remain sky-high.
So who can save Europe? Well, to begin with, the ECB and Germany. Germany's favorite prescription for the problem countries is to "do a Germany"-- that is, reform their economies in order to restore competitiveness. Success, they claim, will follow. And, on the surface, they're right. The way out is to "do a Germany"... except the German story of what "doing a Germany" means looks nothing like the reality. Because, if you look at the data, what really got the German economy buzzing about 15 years ago was... an export boom to the rest of Europe. That export boom came about because of... an inflationary boom in the peripheral countries. It wasn't the Zimbabwe-style hyperinflation that Ron Paul thinks is inevitable all the time, but it was a period of higher inflation in southern Europe than in the north. Interestingly, that inflationary boom was fed largely by German banks. In short, German banks made loans to the European periphery, which drove up costs in those countries and made German exports more competitive in those countries. As a result, all Germany had to do was keep wages and prices from rising relatively less than they did in southern Europe and, voila, they had an export boom to those countries that put millions of Germans to work and allowed their economy to get going. Restoring prosperity in the south requires a reversal of that process. The Germans, in short, need to consume more. The resulting inflationary boom would reverse the massive balance-of-payments imbalance plaguing Europe (because that's really at the core of Europe's crisis) and allow southern Europe to export its way out of trouble. Except that Germany's inflationary boom would need to be substantially bigger than the one that southern Europe experienced about a decade ago, since the capital imbalances now are so much bigger than they were then.
This approach is the functional equivalent of southern Europe and Ireland experiencing deflation to restore competitiveness, except that it's actually feasible. A massive debt overhang arising from the bursting of huge real estate bubbles in Ireland and Spain (both of which were even bigger than the one in the US) has left the private sectors (consumers and businesses) deeply underwater. Deflation would mean cutting wages to workers. But that's self-defeating when it comes to actually repaying the debts, since debt is denominated in nominal terms. Imagine you make $100,000 and have annual debt payments of $20,000. Now imagine you lose your job and your income falls to $60,000. All of a sudden, making those debt payments is a lot harder. In a lot of cases, it's essentially impossible. Yet that's what deflation across Europe would mean for southern Europe.
Of course, most of this is wishful thinking. The Germans accepting higher inflation (in the 5% range) is about as likely as the US electing a Socialist Party candidate president. But, if the goal is to keep the Euro-zone together, accepting that much inflation may be the least painful way out. Just don't tell that to the Germans. If the leech therapy doesn't work, the problem must be too few leeches. If they keep it up long enough, the leeches will suck Europe dry.
Much of the American left sees this as an affirmation of their principles. I don't think this is right. I don't think Europeans are voting along ideological lines the way most Americans do-- I think at this point, they're voting to reject the ridiculous austerity push that's destroying Europe. What that means, I think, is that Europeans aren't voting for a bigger welfare state, for higher corporate taxes, and for a later retirement age. There's already a pretty robust progressive consensus in literally all of those countries on universal health care, income security, and other issues that seem to divide Americans. Rather, their vision for the short run (which, as Larry Summers has poignantly pointed out, can quickly crystallize into the long run if economies stay depressed long enough) differs dramatically from the proven failure that the governing parties provided.
A lot of fearmongering in the US comes, in particular, from those opposed to Hollande. In particular, his proposal to hike marginal tax rates on millionaires to 75% is seen as class warfare. Now, the rhetoric of class warfare is silly, but a 75% top rate is almost certainly bad economics (it might make sense, say, for incomes over $10 million, but for all but the mega-rich, a marginal tax of 75% is probably not good policy). But, as bad policy goes, I don't think it's catastrophic, even if it were enacted (which I don't think it will be; to me it smells like election-year pandering). But in the US, there's a strong reaction to Hollande-- the political left sees his election as a vindication of activist government, and the right sees it as a disaster-- spoiled constituents turning to an irresponsible leftist promising a free lunch.
But, for me, the election is about neither; it's a typical election-year play, just like the 2008 election was in the US. In short, when things are improving, incumbents get re-elected. When they're deteriorating, incumbents get tossed out. And in Europe, the situation is certainly deteriorating. The root of that deterioration is the austerity imposed on Europe by the Merkel-Sarkozy axis in Germany and France; hopefully the French public's election of Hollande represents the beginning of the end for that destructive alliance.
For the Germans especially, the desire is to see the problems in southern Europe and Ireland as a morality play; the southern Europeans were irresponsible, and they need to pay for their irresponsibility with austerity. There's a "necessary period of suffering" to restore the economies. That's almost complete baloney. The "almost" is in there because irresponsibility was the story in Greece. But, as I've probably mentioned before, Spain had a substantially smaller debt burden than Germany, and a budget surplus in 2007. Exactly what "irresponsibility" are the Spanish supposed to pay for? Ireland is a similar story-- it had an even smaller debt burden than Spain, and very little public debt. Then the crisis struck. Ireland's played the good soldier and endured the bleeding treatment prescribed by Dr. Merkel. The result has been... nothing resembling a recovery (no matter what Europe's wise men might proclaim, austerity in Ireland has been rewarded with... high unemployment and terrible suffering. The market haven't expressed "confidence" in the Irish either-- their borrowing costs remain sky-high.
So who can save Europe? Well, to begin with, the ECB and Germany. Germany's favorite prescription for the problem countries is to "do a Germany"-- that is, reform their economies in order to restore competitiveness. Success, they claim, will follow. And, on the surface, they're right. The way out is to "do a Germany"... except the German story of what "doing a Germany" means looks nothing like the reality. Because, if you look at the data, what really got the German economy buzzing about 15 years ago was... an export boom to the rest of Europe. That export boom came about because of... an inflationary boom in the peripheral countries. It wasn't the Zimbabwe-style hyperinflation that Ron Paul thinks is inevitable all the time, but it was a period of higher inflation in southern Europe than in the north. Interestingly, that inflationary boom was fed largely by German banks. In short, German banks made loans to the European periphery, which drove up costs in those countries and made German exports more competitive in those countries. As a result, all Germany had to do was keep wages and prices from rising relatively less than they did in southern Europe and, voila, they had an export boom to those countries that put millions of Germans to work and allowed their economy to get going. Restoring prosperity in the south requires a reversal of that process. The Germans, in short, need to consume more. The resulting inflationary boom would reverse the massive balance-of-payments imbalance plaguing Europe (because that's really at the core of Europe's crisis) and allow southern Europe to export its way out of trouble. Except that Germany's inflationary boom would need to be substantially bigger than the one that southern Europe experienced about a decade ago, since the capital imbalances now are so much bigger than they were then.
This approach is the functional equivalent of southern Europe and Ireland experiencing deflation to restore competitiveness, except that it's actually feasible. A massive debt overhang arising from the bursting of huge real estate bubbles in Ireland and Spain (both of which were even bigger than the one in the US) has left the private sectors (consumers and businesses) deeply underwater. Deflation would mean cutting wages to workers. But that's self-defeating when it comes to actually repaying the debts, since debt is denominated in nominal terms. Imagine you make $100,000 and have annual debt payments of $20,000. Now imagine you lose your job and your income falls to $60,000. All of a sudden, making those debt payments is a lot harder. In a lot of cases, it's essentially impossible. Yet that's what deflation across Europe would mean for southern Europe.
Of course, most of this is wishful thinking. The Germans accepting higher inflation (in the 5% range) is about as likely as the US electing a Socialist Party candidate president. But, if the goal is to keep the Euro-zone together, accepting that much inflation may be the least painful way out. Just don't tell that to the Germans. If the leech therapy doesn't work, the problem must be too few leeches. If they keep it up long enough, the leeches will suck Europe dry.
Subscribe to:
Posts (Atom)