Tag: free riders

Subsidizing the Security of Wealthy Allies

How much does the United States spend on the military relative to our allies? A lot. 

A new Cato video, produced by Cato multimedia gurus Caleb Brown and Austin Bragg, puts this comparison in perspective. The data jumps out of the Cato infographic from last week, and shows how we are subsidizing the security of our wealthy allies who can and should defend themselves. Instead, we provide for their security while they free-ride and spend their money on everything else (including bloated welfare states). Your tax dollars at work. 

Check out the video below.

U.S. Cuts Welfare Payments to Portugal, Portuguese Unhappy

American alliances are systems that transfer wealth from U.S. taxpayers and their debtors to citizens in wealthy allies. With Uncle Sam paying for those countries’ defense, their governments are free to use their own revenues for welfare programs or other domestic priorities. This is a sucker’s bet from an American perspective, but pretty great from the perspective of the citizen of a rich country who benefits from this largesse.

The Wall Street Journal’s news section over the weekend showed this phenomenon in an article illustrating the wages of sequestration. In the course of trimming the U.S. troop presence in Europe from 74,000 to 67,000 over two years, the strategically vital hamlet of Praia da Vitória in the Azores will be particularly hard hit. You see, the U.S. military presence will be reduced there, possibly by more than 1,000, devastating the economic well-being of the village, population 22,000.

One sympathizes with the Portuguese citizens who, over three generations, have come to rely on U.S. taxpayer dollars for their well-being. They don’t really know a world without that economic nourishment, so it must be unnerving to think about what will happen without it.

The story reads like a bad breakup. One U.S. official quoted in the article charged with breaking the news that we’re just not that into them remarked that the Portuguese felt “we are no longer important to you and we have been your best friend. They took it personally.” Worse, they felt “strategically devalued.” Other unnamed officials rubbed salt in the wound, noting the danger that the removal of U.S. troops threatened to “diminish the continent’s value as a strategic partner,” implying that its strategic value is provided by Washington.

The article also noted that the Portuguese are already whispering about having their eye on another suitor:

Since word of possible cutbacks at the base surfaced a year ago, rumors began circulating that the Americans would leave [the base] entirely, and that China, which has growing economic ties with Portugal, would establish a naval base their to patrol the Atlantic.

An American conservative movement worthy of the name would realize the economic strain the country is under and wouldn’t be embracing situational Keynesianism and trying to insulate the bloated military budget from cuts. It would be pointing out that this system of transferring money from U.S. taxpayers to taxpayers in Japan, or Germany, or Portugal is bad for Americans, unconservative, and unnecessary.

Unfortunately, we don’t have that kind of conservative movement.

Romneycare & Free Riders

During last night’s GOP presidential debate, Rick Santorum and Mitt Romney had a polite disagreement over Romneycare’s impact on free-ridership in Massachusetts. The short version: Santorum was right. Romney and even FactCheck.org disputed Santorum’s claim, but they misunderstood it.

The exchange comes 2:15 into this video from Kaiser Health News:

Here’s the Kaiser Health News transcript:

SANTORUM: Just so I understand this, in Massachusetts, everybody is mandated as a condition of breathing in Massachusetts, to buy health insurance, and if you don’t, and if you don’t, you have to pay a fine.

What has happened in Massachusetts is that people are now paying the fine because health insurance is so expensive. And you have a pre-existing condition clause in yours, just like Barack Obama.

So what is happening in Massachusetts, the people that Governor Romney said he wanted to go after, the people that were free-riding, free ridership has gone up five-fold in Massachusetts. Five times the rate it was before. Why? Because…

ROMNEY: That’s total, complete…

SANTORUM: I’ll be happy to give you the study. Five times the rate it has gone up. Why? Because people are ready to pay a cheaper fine and then be able to sign up to insurance, which are now guaranteed under “Romney-care,” than pay high cost insurance, which is what has happened as a result of “Romney-care.”

ROMNEY: First of all, it’s not worth getting angry about. Secondly, the…

(APPLAUSE)

ROMNEY: Secondly, 98 percent of the people have insurance. And so the idea that more people are free-riding the system is simply impossible. Half of those people got insurance on their own. Others got help in buying the insurance.

FactCheck.org writes:

Romney is right. The percentage of insured residents in the state went up from 93.6 percent in 2006, the year the law was enacted, to 98.1 percent in 2010. And data from the state Division of Health Care Finance and Policy show a 46 percent decline in the number of free care medical visits paid for by the state’s Health Care Safety Net. The number of inpatient discharges and outpatient visits under the program went from 2.1 million in 2006 to 1.1 million in 2010 (see page 12)…

A Santorum campaign spokesman pointed us to a Wall Street Journal column by Michael F. Cannon of the libertarian Cato Institute, who stated that “Massachusetts reported a nearly fivefold increase in such free riding after its mandate took effect.” But that doesn’t square with official data just cited. Cannon didn’t specify the time period and so may have referred to some temporary or transitory bump in free riders. We will update this item if we are able to get more information from Cannon.

Speaking of facts, here’s a fun one: both Kaiser Health News and FactCheck.org unnecessarily flank “Romneycare” with quotation marks when it appears within a quote from Santorum. As if Santorum had used quotation fingers. Adorable. But I digress.

Romney and FactCheck.org failed to consider that there are different types of free riding. One type happens when government guarantees access to emergency-room care: people show up to get care, and they don’t pay. Another type happens when government guarantees people the ability to purchase health insurance at standard rates no matter how sick they are: people wait until they are sick to purchase health insurance and drop it right after they get the care they needed. These free riders pay far less than they would in a free market, which would not allow such behavior. Romney and FactCheck.org assumed Santorum meant the former type of government-induced free riding, when he was clearly talking about the latter.

The data that Santorum and I cite come from a report by the Massachusetts Division of Insurance. See this June 2010 blog post, where I quote the Boston Globe:

The number of people who appear to be gaming the state’s health insurance system by purchasing coverage only when they are sick quadrupled from 2006 to 2008, according to a long-awaited report released yesterday from the Massachusetts Division of Insurance.

The result is that insured residents of Massachusetts wind up paying more for health care, according to the report.

“The active members subsidize some of the costs tied to those individuals who terminate within one year,” the report says…

The number of people engaging in this phenomenon — dumping their coverage within six months — jumped from 3,508 in 2006, when the law was passed, to 17,177 in 2008, the most recent year for which data are available.

Actually, it more than quadrupled: 17,177/3,508≈4.9. But whatever. Santorum was right.

One might object that these numbers seem like small potatoes compared to the apparent drop in visits paid from the Commonwealth’s Health Care Safety Net program. Fair point. But the type of free riding Santorum identified is incomparably worse than the kind that happens in hospital emergency rooms. When people can wait until they are sick to purchase insurance, overall premiums rise so high that the health insurance market collapses in an “adverse selection death spiral.” That’s how Obamacare destroyed (and is destroying) the market for child-only coverage in dozens of states. It’s why Obamacare’s CLASS Act collapsed years before it collected a single premium. It’s happening very slowly in Massachusetts, but it is happening. And it will happen to all private health insurance under Obamacare. In contrast, as I mention in my Wall Street Journal piece, the ER-type of free riding increases health insurance premiums by “at most 1.7 percent,” according to the Urban Institute. That’s not ideal, but it’s not catastrophic.

One might also object that this latter type of free riding can’t be a problem since Romneycare has increased the number of Massachusetts residents with health insurance coverage. Also a fair point. But not only can adverse selection occur at the same time that coverage is expanding, it has the potential to completely undo those coverage gains over time. Moreover, some of Romneycare’s supposed coverage gains might be people who are actually uninsured but conceal that fact from government surveys rather than admit to unlawful behavior. These are the ultimate free riders: they’re not even paying the fine. In this Cato Institute study, Aaron Yelowitz and I found evidence consistent with such concealment behavior in the Census Bureau’s Current Population Survey.