The surreality of health care reform

It looks like the House of Representatives today will likely pass a version of the Senate health care bill, thus clearing another hurdle in enacting some form of the health care reform which Barack Obama has been pushing.

A brief word on the politics first. Any presidential candidate in the future who says that he or she is going to “change Washington” should be openly laughed at and ridiculed. George W. Bush promised to “change the tone in Washington” when he ran for President in 2000 and of course Barack Obama based most of his 2008 campaign on a relatively fuzzy message of “hope” and “change”. And apparently people were somewhat swayed by this romantic notion of a new President-elect riding his white horse into Washington and slaying the demons of partisanship and cynicism. The ugliness of how this health care bill has been pushed through should lay to rest any notions that Obama is a different kind of President in whom we should invest our hopes for the future. I hope people are less romantic in future elections about what the holder of the office of the President is able to accomplish. Whatever you can say about Barack Obama’s successes or failures so far, bipartisanship certainly has not been a major accomplishment.

Now on to the substance of health care reform. I have been thinking quite a bit about this over the past year and I offer up these observations which lead me to the conclusion that the Congress is going in exactly the wrong direction in trying to reform health care in the United States.

Health care is not equivalent to health insurance

This is the most fundamental flaw in my mind with the overall approach that Congress is taking to health care reform (which is often referred to as health insurance reform). Yes, most people obtain health care services through a health care insurance policy administered by an insurance company and most health care insurance policies are provided by the person’s employer. The reason for this historically was that during World War II when wage controls were imposed on employers, companies (primarily defense contractors) had to find alternative ways to compete for workers and thus started adding health insurance benefits as part of their employment offers. Thus a tax-exemption for employer-provided health insurance became part of the law because of the original bad idea of imposing wage controls. A similar tax exemption has not been provided when health insurance is purchased by individuals. (See here for more info.)

But despite this historical anomaly which led to our present-day system which is biased towards employer-provided health insurance, why should health care services be delivered through insurance anyway? My argument against this is that there are many goods or services more important than health care, such as food, clothing and shelter. Without those three basics, a person would have a difficult or impossible time staying alive, much less staying healthy. So why don’t we have food insurance, or government run food stores? Why don’t we have clothes insurance so the government can ensure that we’re all clothed properly? Because insurance is not an efficient way to pay for these goods, and neither is it efficient when paying for health care.

I realize that I quote Milton Friedman a lot on this blog and I promise he is not the only economist that I have read, but during his career he had a way of communicating complex ideas in economics very simply, so I can not resist quoting from his 2001 essay on “How to Cure Health Care“:

We have become so accustomed to employer-provided medical care that we regard it as part of the natural order. Yet it is thoroughly illogical. Why single out medical care? Food is more essential to life than medical care. Why not exempt the cost of food from taxes if provided by the employer? Why not return to the much-reviled company store when workers were in effect paid in kind rather than in cash?

If we want to ensure that the citizens of the US remain healthy, finding a way to ensure everyone gets the health care they need ought to be the primary goal, not expanding insurance coverage. Which brings us to the next point:

Health is not equivalent to health care

This is an even more basic point which I think has been widely overlooked. Having access to health care is not directly correlated with one’s health, and lacking access to health care does not mean that one is unhealthy. I’ll give a simple example using my own situation to clarify what I mean. I am 33 years old and have had health insurance provided either by my parents’ employer or by my employer for as long as I can remember. I am also a relatively healthy person by most measures. Yet I have not been a consumer of health care services (i.e. I haven’t gone to a doctor for a checkup) in over 15 years. (I have gone to the dentist and the eye doctor on a couple of occasions during that time period.) The primary reason that I’m healthy is that I am relatively young and live a healthy lifestyle. I am fortunate that I have not been in any major accidents or contracted any diseases that would affect my health. But as long as I have had health insurance, it has mostly been a waste of money for me (though I didn’t strictly pay for the coverage, what has been paid by my employer presumably would have been paid to me in wages instead absent the health insurance benefit.) I would certainly have wanted to have some kind of health insurance to cover an accident or unforeseen illness during that time, but for basic health care services like going to the doctor for a checkup or paying for prescription drugs, I would have been much better served by paying for any of those things out of pocket if I had needed them.

Many might say that’s fine for me, but for the vast majority of Americans, we need to provide a better way of providing them with health care, but my basic point that increasing access to health care won’t somehow automatically make us healthier as a nation still stands.

Health insurance encourages unnecessary spending on health care and discourages efficiency because consumers aren’t spending their own money

Again from Milton Friedman:

Two simple observations are key to explaining both the high level of spending on medical care and the dissatisfaction with that spending. The first is that most payments to physicians or hospitals or other caregivers for medical care are made not by the patient but by a third party—an insurance company or employer or governmental body. The second is that nobody spends somebody else’s money as wisely or as frugally as he spends his own.

Arthur Laffer called this the “health care wedge” and it seems like such a basic observation, it is amazing that it’s not treated as common sense; rather it almost seems counterintuitive to people used to the present system.

The health-care wedge is an economic term that reflects the difference between what health-care costs the specific provider and what the patient actually pays. When health care is subsidized, no one should be surprised that people demand more of it and that the costs to produce it increase. Mr. Obama’s health-care plan does nothing to address the gap between the price paid and the price received. Instead, it’s like a negative tax: Costs rise and people demand more than they need.

Insurance companies need to make money

One part of the health care debate that really gets to me is the relentless vilification of the health insurance companies. People routinely complain that health insurance companies deny coverage to people who are sick and really need the coverage or that they deny coverage for “pre-existing conditions”. Imagine for a moment we were not talking about health insurance but automobile insurance. If I buy collision insurance for my car and then take my car in for repairs from an accident, will the insurance company care if the accident occurred before I purchased the insurance? Of course they would. That’s a form of “pre-existing condition”. I ask: why on earth would a business knowingly offer you an insurance policy with a low premium if it was guaranteed that they would have to pay more money out to you (or your auto mechanic or your doctor) than they would be taking in through the premiums they charge you? It’s absurd to think that. Yet that is what we expect from health insurance providers. I agree there’s a moral component to the argument here, i.e. it’s a little cruel to say that someone with cancer shouldn’t be treated if they lose their job and thus their insurance coverage. But the point is that we need to find a way other than insurance to provide for these types of costs. All that will happen when insurance companies are forced to cover people who would not normally be eligible for insurance coverage according to their normal criteria is that premiums will have to go up for everyone else.

We don’t know who the people are who currently lack health insurance coverage

According to the Census Bureau, there are approximately 46 million people who do not have health insurance. Though this likely includes some foreign nationals, that’s not the important point here. My point is, who are these people who don’t have health insurance? It seems likely that they fall into several categories:

  • People who are too poor to afford health insurance and don’t have a job which provides health insurance as a benefit.
  • People who chose not to have health insurance, (either because they pay for their own medical care or they are young and don’t feel like they need coverage) but otherwise could afford it.
  • People who are in between jobs or have a gap in insurance coverage (it seems likely this rate would be close to the unemployment rate, i.e. people who are in between jobs are more likely to be lacking insurance coverage at least temporarily.

Maybe there are some additional categories, but it seems like those would pretty much cover most of the reasons for people being uninsured.

For the first category, I have a simple question: what the heck is Medicaid for if not to provide access to health care for people who can not afford it? If the response to that question is that Medicaid doesn’t work that well, then I would follow up by asking: why on earth would a brand new middle class entitlement work any better if we can’t get Medicaid to work well?

For the second category, it seems that if people can afford insurance but choose not to buy it, the rest of us should not go out on a limb to force subsidize payments for something they didn’t want bad enough to pay for it themselves. Of course the biases toward employer-provided medical care make purchasing your own policy tougher and more expensive but many people have done it.

For the third category, I believe if we addressed the more fundamental flaws of the tax preferences and biases toward employer-provided medical care, this category would not be as prominent. It does seem fair to provide some assistance to folks who are temporarily jobless in the same manner that we compensate for lost income with normal unemployment insurance.

So how many people are in each category? I know there have been some studies done, but it’s hard to say for sure. My point is we should not focus on this group until we know more about who they are and what are the reasons that they currently lack health insurance coverage. And again, simply not having health insurance doesn’t mean they lack access to health care.

I have some more thoughts which I will try to type up later, but that is all I have for now. I’m sure there will be lots more to come on this topic even if the Congress sends a law to the president and it gets signed and becomes law.

The importance of Citizens United

So much to blog about and so little time. The first topic I’ve wanted to blog about recently but haven’t had time is the Supreme Court’s decision in the Citizens United v. Federal Election Commission case. As Matt Welch from Reason Magazine explained it:

Citizens United, a conservative 501(c)(4) nonprofit that has funded a dozen political documentaries over the years, produced a critical documentary about Hillary Clinton in 2008 entitled “Hillary: The Movie.” By a decision of the federal government, which was enforcing the Bipartisan Campaign Reform Act (known more broadly as McCain-Feingold), this piece of political speech was banned from television.

Let’s boil it down to the essential words: Political documentary, banned, government.

When considering only the narrow facts of the case, it is hard to see how the Supreme Court could have upheld the ban on a political documentary funded by a private non-profit group simply because it advocated against a particular political candidate. As numerous commentators have pointed out, political speech ought to be the most protected form of speech, not the least.

But the Supreme Court didn’t have to go all the way and say that banning corporations from engaging in speech was unconstitutional, they only needed to rule narrowly in favor of Citizens United and not overturn previous decisions that allowed the government to ban certain types of political speech (sometimes referred to using the derogatory term ‘electioneering communications’). To do so would have required sustaining some very tortured logic which might go something like this:

  • Individuals have the right to free speech, including spending their own money on political advertisements, or spending their own money on financing their own campaign for political office.
  • Individuals, however, do not have the right to contribute as much as they want to someone else’s campaign, they may only contribute an amount that the government decides is appropriate.
  • When one or more individuals form a corporation, they lose the right to pay for either political advertisements or to contribute to political campaigns, except through strange organizations called political action committees.
    • Except when the corporation is a “media” corporation, e.g. The New York Times Company or Disney or Time Warner, in which case the corporation may advocate without limits for any political candidate or issue.
    • And except if that corporation is a non-profit or is not a really big and evil corporation like ExxonMobil, a firm which everyone agrees should never be allowed to make any political speech whatsoever.
  • When individuals form a corporation or union, they may spend as much as they want on political advocacy as long as they don’t mention any political candidates’ names.

Such was the logic of campaign finance before Citizens United was decided. The bullet in red would have been necessary to add to this argument in order to decide in favor of Citizens United while still preserving the right to censor some corporations. Of course, as Ilya Shapiro of the Cato Institute observed, individuals don’t lose their rights when they form corporations. An astute observer will note that Citizens United only rectifies the discrepancy in the third bullet listed above. Political contributions are still severely restricted by the government. All of this in the name of “clean” elections. Take note of the contribution limits defined by the FEC for 2009-2010:

Surely one can see that the more restrictions we try to make on political contributions, the more we simply shift the money into darker corners where it is harder to trace who is influencing whom. Does anyone believe that the Bipartisan Campaign Finance Reform Act of 2002, aka McCain-Feingold, having been in effect for 8 years, actually succeeded in its goal of “taking money out of politics“?

An interesting debate on the Citizens United case between Nick Gillespie of and Lawrence Lessig of Harvard University was recently shown on the Bill Moyers show on PBS. Both Gillespie and Lessig agree that the real problem is not political advocacy by corporations or political contributions but the fact that so much money is spent on trying to persuade Congress to act in favor of this interest or the other, an act known as “lobbying”.

Professor Lessig’s solution to this is to create what he calls “fair elections” which would be financed by the government (see the website here). But as noble as the idea of “fair elections” sounds, doesn’t it seem wrong that government gets to decide who can run in elections and who can’t? If you think that is not how “fair elections” work, then how is it decided who can run?

Let’s take an example. I think I might like to run for Governor of Colorado some day. How about I run during the next election cycle? “But how do you expect to raise the money to do that?” you might ask. Balderdash, I say, it is not “fair” that I need to have money to run for elected office. I demand my right to public money to finance my gubernatorial election. “Wait a minute”, you say, “You’ve never had any experience running for political office.” Well neither had Ronald Reagan or Arnold Schwarzenegger when they ran for Governor of California or Ross Perot when he received 19% of the vote in the 1992 presidential election. What is more “fair”: that I raise enough money to prove that I have some popular support and that I am in fact a serious candidate, or that I get money from the government simply because I’d like to be Governor. So you see, it’s not that easy to take money out of politics. And if you accept the idea that spending money is a form of speech (if I want to “speak” to all the readers of the Wall Street Journal via a full-page advertisement, I certainly have to spend money to do so), then we ought to let the speech and the money run free.

One final thought on free speech. Milton Friedman once wrote that the wisdom of the First Amendment is that it treats all forms of speech as a “bundle”. In his case, he was arguing in favor of constitutional restrictions on what the government may do in terms of economic policy. But his example of the First Amendment is very compelling:

Many specific restrictions on freedom of speech would be approved by a substantial majority of both legislators and voters. A majority would very likely favor preventing Nazis, Seventh Day Adventists, Jehovah’s Witnesses, the Ku Klux Klan, vegetarisns, or almost any other little group you might name from speaking on a street corner. The wisdom of the First Amendment is that it treats these cases as a bundle. It adopts the general principle that “Congress shall make no law … abridging the freedom of speech”; no consideration of each case on its merits.

And so we should, in the case of political speech and more specifically in campaign finance, resist the temptation to judge each individual case on its merits but adopt the general principle that the government ought not to be allowed in any case to dictate who can speak, either through literal “speech” or indirectly through spending money on political contributions. Let the citizens and voters of the country hear all of the voices and decide for themselves who is to be believed and who isn’t.

"I, Phone" and the power of examples in economics

As I’ve been reading a lot of books on economics in the past year or so, one of the things that is interesting to me is how often the most basic examples crop up over and over again. Quotes from Adam Smith are often the most commmon such as the following quote from The Wealth of Nations, probably his most famous:

Every individual…generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

And the following quote, probably the second most famous:

It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

Another famous example that crops up time and time again comes from Frédéric Bastiat, who described the fallacy of the “broken window” in his famous essay “That Which is Seen and That Which is Not Seen”. Henry Hazlitt later expounded on this same basic example in his book Economics in One Lesson. Hazlitt thought the basic lesson of economics was so critical, he attempted to sum it up in one sentence:

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Another famous example that crops up time and again is the story of how a pencil is manufactured, popularized in the delightful short story called “I, Pencil” by Leonard Read. In this story, told from the point of view of a simple lead pencil, the pencil describes his “genealogy” and illustrates, somewhat indirectly, how global trade and the price system work to make pencils so cheap and the production and distribution of those pencils possible. Milton Friedman used the same example of the lead pencil in his 1980 PBS series Free to Choose.

Russ Roberts also used the example of the pencil in his book The Price of Everything. I’ve posted about this book before, and still can’t recommend it highly enough. This book and the podcast where Russ Roberts discusses the book and its ideas with Arnold Kling have been important thought-provoking stimuli for me.

So, to get to the point of my post, I have been thinking quite a bit about how to write an essay (or maybe something longer) called “I, Phone” which would be an updated version of the “I, Pencil” essay. The essay would describe the components that make up an iPhone, both hardware and software. But more fascinating would be tracing the history of the scientific and technical progress that was necessary to be achieved before a device such as the iPhone was possible. Just looking at the software, you can begin to imagine tracing back some of the core OS to the original invention of Unix at Bell Labs, the creation of the Mach microkernel at Carnegie Mellon, the creation of Berkeley Unix (later BSD) at Berkeley in the 1970s, the invention of Objective-C (the main programming language used to create most iPhone applications) by Brad Cox in the 1980s, and so on.

More on this later.

More on terminology

Steve Horwitz writes in The Freeman about whether or not the term “capitalism” is outdated and should be replaced with something else. The articles are here and here. This is related to an earlier post I made on the insufficiency of our terminology when discussing economic and political issues in particular.

This is an issue that I find very fascinating because terminology can so often be misused, and often the misuse is intentional to further a political agenda (see the book 1984 for a classic example on how the government intentionally abused the language to further its goals). Take the concept of “network neutrality”. Sounds hard to oppose, right? Keep our content distribution networks “neutral” so certain content providers don’t have an unfair advantage over others. I wasn’t really sure what to think about net neutrality until I read an article (can’t remember what the source was but it was similar to this article from the Tech Liberation Front) arguing that the proposed rules for net neutrality were essentially price controls.

The price and wage controls that were imposed by Nixon in the 1970s to try to combat inflation are now widely seen as a failure, so the term “price controls” now carries a mostly negative connotation. Similar to the net neutrality proposal, the pending health care legislation that is being debated in the House and Senate contains all kinds of price controls, including (as one tiny but illustrative example) the ridiculous amendment forcing health insurance providers to make mammograms available in health insurance plans “free”. So why don’t we refer to the pending legislation as the health care “price control” bill, instead of the “health care reform” bill?

It’s all about redistribution

Interesting post from Uwe Reinhardt, an economics professor at Princeton on the recently passed Senate health care bill. He writes that both the Senate and House bills appear to endorse this “solution” for health care costs:

Americans in the upper half of the nation’s income distribution will have to tax themselves in order to help subsidize the purchase of health insurance by families in the lower half of the income distribution.

The article is interesting, because Mr. Reinhardt is quite honest about the fact that the health care bill is mainly a way to redistribute the costs of health care. Another key quote:

This has meant that for young and very healthy individuals, premiums have tended to be relatively low. For older or sicker individuals, premiums have been high, sometimes prohibitively so.

Community rating is intended expressly to redistribute the financial burden of ill health from the chronically unhealthy to the chronically healthy.

Whether or not one considers that fair is a political call.

What he fails to point out is that in transferring the cost of health care from the elderly (what he calls the chronically unhealthy) to the young (the chronically healthy) we are actually transferring the cost from the (relatively) poor to the (relatively) rich. Who has a higher net worth, the average 65 year old or the average 25 year old? (Hint, it’s the one who has spent nearly five decades in the labor force accumulating capital).

It’s bad enough when we have to argue about redistributing wealth from the “rich” to the “poor”. But at least one can make a fairly consistent political or philosophical argument about why that would lead to more “fairness”. Transferring the cost from the young, who are on average far “poorer” than the elderly (who would be likely to benefit the most from health care reform since they are the biggest consumers of health care) is unfair and unjust. Too bad no one out there seems to be noticing.

Remember this prediction

From Washington Post columnist E.J. Dionne’s latest column on health care, comes this prediction:

The bill before the Senate would cut the deficit, not increase it, and would stabilize or reduce health care premiums for most people, not raise them. The proposal contains serious cost-control measures that can be built on over time. Passing health care reform is thus not only morally necessary, but also fiscally responsible.

If the Senate bill passes, I’ll send a note to Mr. Dionne asking him for a mea culpa when this prediction does not pan out. Part of my fascination though, not just with this column but with much of political conversation, is how people like this actually seem to believe what they’re saying. What amount of evidence is needed to convince such a person that the unintended consequences of government action will end up doing far more harm than the good intentions? I’m sure that more people will likely have access to health insurance if the health care “reform” legislation passes, but at what cost? It’s simply preposterous to think that it will be free.

The appeal of Sarah Palin

I admit it, I was a fan of Sarah Palin during last fall’s presidential election. I found her personal story interesting, but more importantly, I saw her as someone who would be willing to shake up the Republican party nationally as she did in Alaska. The day after she was announced as John McCain’s running mate, I donated to his campaign for the first time.

Alas, history was not on the side of the Republican ticket last year so even though Sarah Palin probably gave John McCain his best chance of winning, McCain’s fate was probably sealed long before he ever picked Palin. In addition, his public statements and erratic reaction once the “financial crisis” went into full gear (at one point “suspending” his campaign like that would make any difference) probably clinched the election for Obama.

But back to Palin. The problem with the hope that she would shake up the national party is that she was running for Vice President. As the vice presidential candidate, you don’t do any shaking up, you advocate for the guy at the top of the ticket. The other part that is interesting about the vice presidential candidate is that while the media (and the small portion of the public who are political junkies) had nearly two years to vet all of the presidential candidates (and many more years than that if you count all the years the candidates in the primaries had been in the national spotlight), they only had less than two months to vet Sarah Palin. So the narrative that emerged on Sarah Palin the politician necessarily emerged not only hastily, but in the midst of a highly contentious presidential election. To me this means that the “story” of Sarah Palin is far from complete and that she still has plenty of time to emerge as a serious political candidate in the future (see Matthew Continetti’s article in the Wall Street Journal for a good look at Palin’s political prospects).

Having said that (thanks Larry David and Jerry Seinfeld for making that phrase stick in my head), there is certainly a fair amount of anti-Palin sentiment (what’s an antonym for appeal?) which I think is understandable. In her appeal to “common sense”, she tends to snub “elites” and appears to harbor a certain anti-intellectual bias. This is not a positive trait when you are interested in winning a war of ideas. If you are interested in getting elected to national office, it might get you very far, even all the way to an election victory, but it does not help your supporters determine what kinds of policies they can expect you to support. Knowing that Sarah Palin is a “hockey mom” has a certain amount of folksy appeal to some, but that doesn’t do me any good in determining what her position on the nuclear situation in Iran would be, for example.

The inexact science of climate change, part 2

Turns out my previous post was somewhat prescient in describing the “inexact science” of climate change. Less than two weeks after I published that post, a story came out about what is now being called “Climategate” concerning emails that were hacked from a server at a British university. These emails contain frank discussion between leading climatologists over what appears to be efforts to exclude colleagues who qualify as global warming skeptics from the peer review process and efforts to manipulate data so that it reaffirms their conclusions regarding anthropogenic global warming.

I think it’s fair to say that these emails don’t substantially change the existing arguments either for or against “global warming”, but it should remind everyone that a little healthy skepticism is, er, well healthy and not to believe everything you read, whether it is written by journalists who are beholden to a code of journalistic ethics, or scientists who are supposedly beholden to a higher power known as the scientific process. They are all simply humans and make the same mistakes and respond to the same incentives as the rest of us.

UPDATE: It also appears researchers from the same university (University of East Anglia) have thrown away much of the raw data that they used to derive their predictions about global warming. As Russ Roberts says, that’s “not scientific”. My question is: doesn’t anyone else out there have this data? Surely, the “overwhelming consensus” that humans are responsible for global warming was not simply based on the output from this one university in Britain, right?

The inexact science of climate change

On the issue of global warming, or “climate change” as it is more recently known, call me a skeptic. I am aware of the data showing an increase in average global temperatures over the past half century. And I believe that activity from humans very likely played a part in that. I’m not a denier. But one thing I have always been uncomfortable with is the certainty with which global warming alarmists announce with ever increasing despair that we are headed towards a global catastrophe. Much of this certainty is based on the use of computer ‘models’ which are supposed to predict drastic increases in global temperatures over the next century.

There’s just one problem. Models are often wrong. I’m not talking about climate models in particular. I’m talking about computational models that are used to predict the activity of complex systems such as the Earth’s climate. You don’t have to have a degree in Computer Engineering from a top engineering institution (although I do) or have worked for one of the NSF-funded supercomputing centers (although I did) to understand that computer models can often be wrong, or at the very least incomplete.

Here’s a quote from a recent article from the Wall Street Journal’s Jeffrey Ball on the latest debate over climate change:

A few years of cooling doesn’t mean that people aren’t heating up the planet over the long term. But the cooling wasn’t predicted by all the computer models that underlie climate science. That has led to one point of agreement: The models are imperfect.

A U.S. Senate report (produced when the Republicans were in control of the Senate) contained the following quote on climate model uncertainty:

Climate modelers from four separate climate modeling centers wrote in the October 2000 edition of Nature that, “Forecasts of climate change are inevitably uncertain.” They go on to explain that, “A basic problem with all such predictions to date has been the difficulty of providing any systematic estimate of uncertainty,” a problem that stems from the fact that “these [climate] models do not necessarily span the full range of known climate system behavior.”

As James Taranto of the Wall Street Journal quipped in a recent column: “Can we all agree that the time for declaring that the time for debate is over is over?”