Archives: 05/2011

How Not to Criticize Medicare Vouchers

Over at The Incidental Economist, Austin Frakt challenges a couple of claims I made on NPR about Medicare reform.  (Here’s how NPR reported my comments in print.)

My claims are pretty simple.

  1. If Medicare subsidizes enrollees by giving them a fixed amount of money, much like Social Security does, they would be more cost-conscious than they are under the current open-ended subsidy, because enrollees who avoid wasteful spending would themselves get to keep the savings.  Put more plainly, people spend their own money more carefully than they spend other people’s money.
  2. Health insurers and health care providers would compete to serve these cost-conscious Medicare enrollees on the basis of both cost and quality.  Prices would fall while quality improves.

I’m not really sure to what extent all this would occur under the Medicare reforms the House passed a couple of weeks ago, because we don’t yet know to what extent each enrollee’s subsidy would resemble a fixed amount of money.

Here’s what Frakt does with my claims:

[A]s I heard these words I wondered if we had any evidence on hand about the relationship between lower premium subsidies and health care cost inflation. Indeed we do! Premiums in the commercial market are subsidized by the government at a lower rate than those in Medicare. [Emphasis added.]

He then throws up the chart, shown below the jump, showing that for common benefits, the rate of growth in per-enrollee spending is “pretty similar” in Medicare and private insurance.  He concludes: “With data like this, I think we need to reexamine some of our theories about what lower premium subsidies can do.”

Oy, where to begin?

First, Frakt does not actually challenge my claim.  My claim is that voucher-like Medicare reforms will lead to reductions in the per-unit cost of producing certain goods and services, and therefore to lower prices. Frakt responds with data on health care spending.  When someone predicts that P will fall, introducing into evidence what has historically happened to P x Q is no kind of rebuttal. The confusion Frakt sows is rooted in the fact that both prices and spending can be accurately described as costs.  Such confusion could be avoided were everyone to honor Cannon’s First Rule of Economic Literacy: Never say costs when you mean spending.

Second, though the tax preference for employer-sponsored health insurance distorts relative prices the same way an open-ended subsidy does, it is not a subsidy.  This isn’t really relevant to the matter at hand, but it’s worth emphasizing to avoid such silliness as this.

Third, it would be great if there existed one chart that would settle once and for all whether Medicare or a free market does a better job of containing costs.  Alas, this is not that chart.  Frakt uses it to make a less-ambitious point about the effects of larger versus smaller policy-induced price distortions, but its shortcomings nevertheless confound that comparison, too.  In addition to measuring increases in spending (whose effect on social welfare is ambiguous) rather than increases in cost (which are always bad), this chart handicaps private insurance by leaving off three or four years of explosive growth in per-enrollee Medicare spending (1966-1969).  Worse, it reeks of endogeneity problems.  Amy Finkelstein finds evidence that Medicare itself increases spending among those with private insurance (mostly by increasing hospital capacity), and that this effect has grown over time.   Moreover, as Medicare spending rises, so do average marginal tax rates, which increases the price distortion created by the tax exclusion, which increases spending on private insurance.  For all the play it gets on the Left, this chart serves no useful purpose that I can discern.  Economists should be embarrassed to use it.  If it were a farm animal, and social scientists farmers, they would have to take it behind the barn and put a bullet in its head.

Fourth, we are not yet at the point where we need to reexamine the theory that demand curves slope downward.  There is ample evidence to show that Medicare enrollees will respond to voucher-like reforms by choosing more economical health plans, and that health plans and providers will respond with greater efficiency.  Thomas Buchmueller reports:

Two notable experiments…took place in the mid-1990s: the University of California (UC) and Harvard University both offered a menu of plans that varied in generosity, but adopted a “fixed dollar contribution” policy. The plans also varied significantly in cost, so employees had a greater incentive to consider price when selecting a health plan…

In both cases, employees were quite sensitive to price, and were willing to switch plans to save as little as $5 per month in out-of-pocket premiums…In addition to this demand response, participating insurers lowered their premiums in order to compete for enrollment.

Fifth, there is plenty of evidence that prices can and do fall in health care – from research on the markets for laser-eye and cosmetic surgery, to the work of Clay Christensen and his colleagues, to the research of David Cutler and Mark McClellan.  (If spending increases while prices are falling, it is because changes in Q dominate changes in P – which could be due to all these open-ended government subsidies and other price distortions.)

Finally, as a response to the general theme of that NPR story: we’re a long, long way from the point where we have to worry that reductions in the growth of Medicare spending are going harm enrollees’ health.  Relying on data from the Dartmouth Atlas, President Obama’s Council of Economic Advisers reminds us that “nearly 30 percent of Medicare’s costs [spending!] could be saved without adverse health consequences.”  And there is plenty of evidence, from the RAND Health Insurance Experiment and elsewhere, that plans with greater cost-sharing or care management reduce utilization without harming patients’ health.

I cannot fathom what has opponents of Medicare vouchers so spooked.  It cannot be the effects that vouchers would have on Medicare enrollees and taxpayers.

House Leadership’s Transparency Leadership

Last week, House Speaker John Boehner (R-OH) and Majority Leader Eric Cantor (R-VA) wrote a letter to the House clerk calling for new data standards that will make Congress more open and accountable. Spot on.

The THOMAS legislative database was a huge improvement when it came online in 1995 at the behest of the new Republican Congress, but the Internet has moved on. Today, publishing text or PDF documents is inadequate transparency. It’s more important to make available the data that represent various documents and activities in the legislative process. “Web 2.0” will use that data various ways to deliver public oversight.

I’ll have much more to say in the near future, but here are the kinds of things get to full transparency, which the House leaders’ letter appears meant to imply:

  • Specific Formats: Documents and data must be published in specific formats that allow Web sites, researchers, and reporters to interpret and use text and data easily and automatically. The SEC recently began requiring businesses to report financial information in a format called eXtensible Business Reporting Language (XBRL). This will improve corporate transparency and enable investors to make better decisions. The public should have equally good information about government.
  • Flagging/Tagging: Within these data formats, key information must be “flagged” or “tagged” to highlight the things that matter: spending proposals, agencies and programs affected by a proposed law, recipients of federal money, existing statutes that may be amended, and so on. Flagging/tagging will make the relevance of documents and information immediately apparent to various interests.
  • Bulk Access and Real-Time Updates: Documents and information must be available in bulk, so that new users have full access, and it must be updated in real time, so the public can “see” changes as they happen. It also must be version-controlled so the “story” of a policy’s formation or execution can be told. The public should never have to learn what is in a bill after it passes.
  • Authoritative Sources: The mishmash of data sources that now exist must be replaced by authoritative sourcing. Congress, the White House, federal agencies, and other entities must publish and maintain their documents and data. The public must know once and for all where the definitive versions of documents and data will be.

Disclosure—simply “putting bills online”—was the beginning of the legislative transparency project, not the end. The many transparency Web sites out there have the bills, but they don’t have the data they need to help the public get their government under control.

As I suggested some months ago, House Republicans are positioned to take the transparency mantle from President Obama and the Democrats. Web 2.0 thought leader Tim O’Reilly—no Republican cheerleader—has already called the race, Tweeting last week, “The ‘R’s in Congress are doing better on this than ‘D’s did.” Assuming action consistent with this letter, the House Republicans will indeed soon have the transparency lead.

Some Thoughts on Federal Rental Housing Assistance

Last week I participated on a panel on federal rental housing policy, organized by Harvard’s Joint Center for Housing Studies in conjunction with the release of their new report on conditions in the rental market.  In their defense, the report does attempt to avoid offering policy prescriptions.  But the report does come pretty close to suggesting that we spend more on federal rental housing assistance.  In the post-housing bubble  environment, many, myself included, have dared suggest that there’s nothing wrong with someone being a renter, and that maybe we pushed too many into homeownership.

But saying we overdid homeowneship is not the same as saying we ignored rental.  In fact the federal government has spent massive amounts on rental housing, yet according to the new Harvard report, rent burdens have gotten worse over the last 50 years not better.  While the report doesn’t take this step, I think we have to ask: if you’ve spent hundresds of billions of dollars on an issue and it then gets worse, maybe there’s something wrong with what you are doing?

Perhaps my friends on the Left (and/or in the real estate industry) don’t believe we’ve spend all that much on rental housing.  Consider these facts:  in nominal terms the sum of all money spent by HUD, which is almost exclusively rental or “community development,” has been close to a trillion dollars.  By my estimate (based upon the American Housing Survey and the Residential Finance Survey) the current value of all rental housing in the US is about $3.6 trillion.  So the federal taxpayer has paid enough to outright buy almost a third of all rental housing.

Also consider that if we took the approximately $50 billion we now annually spend on rental housing, we could pay 100% of the rent of the almost 4 million households currently paying the lowest rents.  This translates to being able to pay all the rent for every family earning about $22,000 or less.   If we choose to only pay 50% of their rent, we could serve another 2.5 million. 

My point here is not to say we should spend all this money, for I still don’t see this as the proper role of the federal government; the point is that we already spend a huge amount.  Now why might all this money not have made a huge difference in helping renters?  Maybe because most of it gets eaten up by the providers.  For instance a recent paper in Real Estate Economics estimates that only a third of the value of the Low Income Housing Tax Credit actually makes it to the renter in the form of lower rents.  The remaining two-thirds goes to benefit the developers, owners and others who live off the process.  So before we even think about spending more on federal rental assistance, how about making sure what we do spend actually goes to help the poor and not the special interests?

Bin Laden’s Death and the Debate over the U.S. Mission in Afghanistan

Osama Bin Laden’s death marks a significant achievement in the fight against al Qaeda. It also highlights the fact that our ostensible objective for continuing the war in Afghanistan has been achieved. Although some lawmakers have been quick to claim that bin Laden’s demise proves that our nation-building mission is showing signs of success, others recognize that this momentous achievement justifies scaling down our presence in Afghanistan. Indeed, rather than expansive counterinsurgency campaigns, targeted counterterrorism measures would suffice.

It is encouraging that Republican members of Congress are questioning the mission. Senator Richard Lugar (R-IN), ranking Republican on the Senate Foreign Relations Committee, expressed his concern yesterday:

[Senator Lugar] said Afghanistan no longer holds the strategic importance to match Washington’s investment. He cited recent comments from senior national-security officials that terrorist strikes on America are more likely to be planned in places like Yemen.

Lugar raised concerns that U.S. policy on Afghanistan is focused more on building up its economic, political and security systems. “Such grand nation-building is beyond our powers,” he said bluntly.

Most poignantly, he summed up the problem as such:

With Al Qaeda largely displaced from the country, but franchised in other locations, Afghanistan does not carry a strategic value that justifies 100,000 American troops and a $100 billion per year cost, especially given current fiscal constraints.

These realities have neither shifted the GOP establishment’s talking points on defense, nor the Obama administration’s “stay-the-course” policy in Afghanistan. Nevertheless, this debate, especially among Republicans, is important. As my Cato colleague Ben Friedman has pointed out in original research, the Tea Party Republicans that swept into office last November may have good instincts, but have done little to shift the overarching debate about the efficacy of nation-building. Perhaps increased calls for rethinking the mission will have to come from senior GOP types like Lugar. As my other Cato colleague, Gene Healy, trenchantly notes, “There was always something odd about conservatives jumping from ‘they hate us because we’re free’ to ‘if we make them free, then they won’t hate us.”

Cato scholars have been making the case for de-escalation from Afghanistan for the past several years. Hopefully, more Republicans will recognize, as most libertarians already do, that it is inconsistent to espouse talk of fiscal responsibility and limited government at home while engaging in social engineering and nation-building abroad. More republicans should recognize that there is nothing conservative about wasting taxpayer dollars on a mission that weakens America economically and militarily. As Cato founder and president Ed Crane has argued, it’s time for the GOP leadership to return to its non-interventionist roots.

Since 9/11, America’s mission in Afghanistan has evolved dramatically. It’s gone from punishing al Qaeda and the Taliban to paving roads and building schools. To imagine that the U.S.-led coalition can create a functioning economy and establish civilian and military bureaucracies through some “government in a box” highlights the ignorance and arrogance of our central planners in Washington.

Let’s hope that the landmark death of Osama bin Laden brings a swift end to our ongoing investment and sacrifice.

Hazy-Eyed Hunter Prepares to Fire on For-Profits

Yesterday, the U.S. Department of Education sent proposed – and  highly controversial – “gainful employment” regulations to the Office of Management and Budget for review, the first step in the process of officially publishing them. The regulations – assuming they haven’t changed drastically from previous proposed versions – would limit the ability of students in vocational postsecondary programs to access federal financial aid if those programs produce debt burdens the regs deem too high, or salaries they deem too low. The exact details on what constitutes ”too high” and “too low” should be revealed soon.

The big problem with this is that it is aimed at easily abused for-profit schools while leaving the rest of waste-drenched higher education untouched. But another problem, the very real risk of bureaucratic bungling, also looms large. Indeed, a story out just today from California notes that the state greatly overestimated how much it would save by cutting Cal Grant eligibility for students at schools that showed up on a recent U.S. Department of Education list of institutions with high three-year loan default rates. The problem: The Education Department had accidentally calculated three-year-and-three-month rates, significantly overstating defaults. In fairness to the Department, it did say the list was unofficial, so California officials also bear a lot of the blame; but it sure doesn’t bode well that the Department would publish something so flawed.

There is a much more effective, and less dangerous, way to hold schools accountable than to have the federal government set blanket, hyper-politicized rules and try to enforce them. It is to have customers consume higher education using their own money rather than having Washington send tens-of-billions of inflation-fueling, extravagance-enabling dollars to students and schools every year. The problem is, that would just make it too hard to buy votes by falsely promising great education for all.

Wednesday Links

  • Osama bin Laden’s death gives us a chance to end what might have become an era of permanent emergency and perpetual war.
  • The Cold War ended–what are we doing in Korea?
  • Two cheers for President Obama for ending eight (well, three) tax breaks to oil companies.
  • Does Osama bin Laden’s death mean an end to U.S.-Pakistan relations?
  • Please join us next Tuesday, May 10 at 4:00 p.m. Eastern for a Cato Book Forum on America’s Allies and War: Kosovo, Afghanistan, and Iraq, by University of Mary Washington political scientist Jason W. Davidson. Council on Foreign Relations senior fellow and Georgetown University international relations professor Charles Kupchan will join Professor Davidson in a discussion of the book and its themes, particularly U.S. relations with NATO allies, moderated by Cato director of foreign policy studies Christopher A. Preble. Complimentary registration is required of all attendees by Monday, May 9 at noon Eastern. We hope you can join us in person, but we encourage you to watch online if you cannot attend personally.

Seven Reasons to Oppose Higher Taxes

As I have explained elsewhere, tax increases are a bad idea - unless you favor bigger government.

And I’ve already added my two cents to the tax debate between Senator Coburn and Grover Norquist regarding the desirability of higher taxes.

So it won’t surprise anyone to know that I fully agree with this new video from the Center for Freedom and Prosperity, which offers seven reasons why higher taxes are a bad idea.


The video is narrated by Piyali Bhattacharya of Young Americans for Liberty, and here are her seven reasons.

  1. Tax increases are not needed
  2. Tax increases encourage more spending
  3. Tax increases harm economic performance
  4. Tax increases foment social discord
  5. Tax increases almost never raise as much revenue as projected
  6. Tax increases encourage more loopholes
  7. Tax increases undermine competitiveness

I think reasons #1, #2, #3, and #5 are the most powerful.

To a considerable degree, my video on balancing the budget makes the same point as reason #1 about why higher taxes are unnecessary. Simply stated, balancing the budget merely requires a modest degree of fiscal discipline, such as capping spending so it only grows 2 percent per year.

And if tax increases are not needed to balance the budget, then the only purpose they serve is to facilitate a bigger burden of government spending, which is why I like reason #2.

And reason #3 is standard economic analysis, making the common-sense point that if you punish something, you get less of it. This is why it is so misguided to impose higher tax rates on work, saving, investment, and entrepreneurship.

Last but not least, reason #5 is just another way of saying that the Laffer Curve is real, as I explain in this tutorial.