Tag: regulation

GOP Health Care Alternative: Drinking the Massachusetts Kool-Aid

Earlier this morning, my colleague, Michael Cannon, blogged a devastating critique of the Coburn-Burr-Ryan-Nunez alternative to the Obama health plan. As he shows, while the bill has some good features (changing the tax treatment of health insurance, expanding HSAs), the good is swamped by a bizarre collection of regulation, mandates, and hidden taxes.

In fact, the bill appears to be based, in large part, on what its sponsors call “the well-known, bi-partisan achievement of universal health care through a private system in Massachusetts.” But the Massachusetts model has failed to either achieve universal coverage or control health care costs. Rather, as I noted in this recent blog, it has led to more regulation, less consumer choice, and increased insurance premiums, while running huge budget deficits that have already led to one tax increase and are now causing the state to consider premium caps and global budgets. One wonders why congressional Republicans would want to head down that road.

Notably, Coburn-Burr-Ryan-Nunez abandons Rep. John Shadegg’s proposal to allow Americans to buy insurance across state lines in favor of a requirement that states establish Massachusetts-style connectors. But the Massachusetts Connector has been one of the worst aspects of that state’s reform, acting as a super-regulatory body, adding new mandated benefits, restricting consumer’s choice of plans, and adding both regulatory and administrative costs to insurance. (In fact, the Connector adds its own administrative costs, estimated at 4 percent of premium costs, for plans that are sold through it.) What the Connector has not done is live up to its promise of breaking the link between employment and insurance, giving workers personal, portable insurance that they could take with them from job to job, and which they would not lose when they lost their jobs. Unfortunately, the Connector has not lived up to its promise in the latter regard. In fact, as of May 2008, only 18,122 people had purchased insurance through the Connector. That’s very little gain for so much pain.

Since there is virtually no chance that the Coburn-Burr-Ryan-Nunez will actually be enacted, perhaps one shouldn’t get too excised about its failings. No doubt it is far superior to Obamacare. And, it is understandable that congressional Republicans want to appear as more than the “party of no.” Still, this looks like a sadly missed opportunity.

The Coburn-Burr-Ryan-Nunes Mandate-Price-Control Bill

Today, Senators Tom Coburn (R-OK) and Richard Burr (R-NC), along with Reps. Paul Ryan (R-WI) and Devin Nunes (R-CA) announced that they will introduce a health care reform bill. If my reading of the bill summary is correct, their bill would:

  • Mandate that states create a new regulatory bureaucracy called a “State Health Insurance Exchange,”
  • Mandate that all plans offered through those exchanges meet federal regulatory standards,
  • Mandate “guaranteed issue” in those exchanges,
  • Mandate “uniform and reliable measures by which to report quality and price information,”
  • Impose price controls on those plans by prohibiting risk-rating,
  • Launch a government takeover of the “insurance” part of health insurance, by means of a “risk-adjustment” program intended to cope with the problems created by price controls, and
  • Fall just short of an individual mandate by setting up (mandating?) automatic enrollment in exchange plans at “places of employment, emergency rooms, the DMV, etc.” – essentially, trying to achieve universal coverage by nagging Americans to death.

Needless to say, I am troubled.

The bill summary is self-contradictory. On the one hand, it lists “No Tax Increases” as a core concept. Do its authors not know that imposing price controls on health insurance premiums imposes a tax on healthier-than-average consumers? And where do they think the money for “risk-adjustment” payments will come from? Heaven?

The bill sponsors seem to want to cement in place the monopoly regulation that currently exists at the state level – when they’re not encouraging Congress to take over that function. Have they abandoned their colleague Rep. John Shadegg’s (R-AZ) proposal to allow for competitive regulation of health insurance?

And if Massachusetts created an “exchange” on its own, why do other states need federal legislation?

The bill includes some ideas for which I have more sympathy, like its tax-credit proposal and expanding health savings accounts.

But the above provisions would sow the seeds of a government takeover of health care – so much so that The Washington Post’s Ezra Klein is salivating:

The word of the day is “convergence.” That – and that alone – is the definitive message of the conservative health reform alternative developed by Sens. Tom Coburn (Okla.) and Richard Burr (N.C.), as well as Rep. Paul Ryan (Wisc.). For now, some of the key provisions are about as clear as mud. The plan’s changes to the tax code, in particular, are impossible to discern. So I’ll do another post when I can get some clarity on those issues. The politics, however, are perfectly straightforward.

A superficial read of the Patients’ Choice Act – which I’ve uploaded here – would make you think you’re digging into a liberal bill. A fair chunk of the rhetoric is lifted straight from Sen. Ted Kennedy’s office. “It is time to publicly admit that the health care system in America is broken,” begins the document. “Health care is not a commodity in the traditional sense,” it continues. “States should provide direct oversight of health insurers to make sure they are playing by fair rules,” it demands. The way we pay private insurers in Medicare “wastes taxpayer dollars and lines the pockets of insurance executives,” it says. Elsewhere, it praises solutions that have worked in several European countries.”

And though it’s still too early to say how the policy fits together, it’s clear that many traditionally Democratic concepts have been embraced. To put it simply, the plan wants to encourage a version of the Massachusetts reforms – which it calls a “well-known, bi-partisan achievement of universal health care” – in every state. There are some differences, of course. The plan doesn’t have an individual mandate. It doesn’t have an obvious tax on employers. But it strongly endorses State Health Insurance Exchanges. And that, for Republicans, is a radical change in policy.

This idea – present in every Democratic proposal but absent in Arizona Sen.John McCain’s plan – would empower states to create heavily regulated marketplaces of insurers. The plans offered would have to “meet the same statutory standard used for the health benefits given to Members of Congress.” Cherrypicking would be discouraged through risk adjustment, which the PCA calls “a model that works in several European countries.” The government would automatically enroll individuals in plans whenever they interacted with a government agency and states would be able to join into regional cooperatives to increase the size of their risk pool.

In essence, Coburn, Burr, and Ryan are abandoning the individual market entirely. Like Democrats, they’re arguing that individuals cannot successfully navigate the insurance market, and they need the protection of government regulation and the bargaining power that comes from a large risk pool. This is literally the opposite approach from McCain, who attempted to unwind the employer-based insurance and encourage families to purchase health coverage on the individual market. The core elements of this plan, in other words, make it the same type of plan Democrats are offering. A plan that enlarges consumer buying pools rather than shrinks them. It’s pretty much exactly what I’d expect a Blue Dog Democrat to propose. And it’s further evidence that the argument over health reform is narrowing, rather than widening. And it’s narrowing in a direction that favors the Democrats.

UPDATE: After discussions with Sen. Coburn’s staff, I happily issued a few corrections. Still, concerns remain.

Simultaneously Destroying and Subsidizing the Auto Industry

The Obama Administration has announced new fuel-economy regulations and emissions rules that will boost the cost of new car by at least $1300. This is probably another nail in the coffin of the American automobile industry, but Jerry Taylor is the guy to provide thoughtful analysis. When I read about the new White House scheme, the first thing that came to my mind was this extremely clever video (yes, I am envious that my videos are not this creative) about the type of car we will all be driving if politicians continue to run amok:

Obama’s Broken Toaster

APTOPIX ObamaRecently on Leno, President Obama compared some financial products to an exploding toaster. His words:

When you buy a toaster, if it explodes in your face there’s a law that says your toasters need to be safe. But when you get a credit card, or you get a mortgage, there’s no law on the books that says if that explodes in your face financially, somehow you’re going to be protected.

So this is – the need for getting back to some common sense regulations – there’s nothing wrong with innovation in the financial markets. We want people to be successful; we want people to be able to make a profit. Banks are critical to our economy and we want credit to flow again. But we just want to make sure that there’s enough regulatory common sense in place that ordinary Americans aren’t taken advantage of, and taxpayers, after the fact, aren’t taken advantage of.

While I think we would all like to get to “common sense” regulation – arriving at such is unlikely if one’s understanding of the very problem is flawed, as seems to be the president’s.

Unlike broken toasters, mortgages and credit cards do not fail to pay themselves – borrowers fail to pay, almost always for a reason that has little to do with the characteristics of the loan itself. There is a wealth of empirical data documenting the causes of bankruptcy, mortgage and credit card default – much of which has been assembled by those on the left (take a look at any of Professor Elizabeth Warren’s work on bankruptcy). The fact is that the number one cause of all of these events is job loss. If the president has a plan for a mortgage that protects you from losing your job, I would love to see how that’s going to work. After job loss, comes unexpected health bills and divorce.

My hope had been that Obama’s talk about broken toasters was just a little pandering and could be safely ignored. However, judging from the structure of his foreclosure relief plan, he appears to believe that if we just lower the borrower’s rate, all would be saved. The sad truth is that his foreclosure plan does nothing for those really in need – who have lost their job for instance – they are simply out of luck. But then helping people who have lost their job would undermine the argument that it is all the fault of the product.

Libertarian Wisdom

From Will Saletan at Slate:

the tricky thing about official intervention is that once the state gets its foot in the door, you don’t necessarily get to dictate what it can and can’t do.

He’s talking about how “For the usual incoherent combination of lefty reasons—not enough private discrimination in working conditions, too much private discrimination in family values–” he ”felt the urge to support regulation of the [surrogate motherhood] industry,” but then he read about Chinese police kicking in doors and forcing surrogate mothers to abort their babies, and realized that wasn’t “the kind of policing liberals have in mind when they call for tighter regulation of the fertility industry.”

But the lesson is broader, of course. It applies to health care, education, energy, faith-based organizations, and just about any enterprise you let the state take a role in.

In Ensuring Credit Card Holders’ ‘Rights,’ Congress May Actually Take Away Their Credit

With a vote expected today on the so-called Credit Card Holders’ Bill of Rights, the U.S. House is poised to follow up on President Obama’s finger-wagging rhetoric about fees and other perceived sins of the credit industry.

But Congress should keep in mind that credit cards have been a significant source of consumer liquidity during this downturn. Now is the worst time to push measures that would curtail the availability of consumer credit, and that is exactly what the Credit Card Holders’ Bill of Rights will do.

While few of us want to have to cover our basic living expenses on our credit card, that option is certainly better than going without those basic needs. The wide availability of credit cards has helped to significantly maintain some level of consumer purchasing during this downturn.

It was the massive under-pricing of risk, often at the urging of Washington, that brought on our current financial market crisis. To now pressure credit card companies not to raise their fees or more accurately price credit risk, will only reduce the availability of credit while undermining the financial viability of the companies, ultimately prolonging the recession and potentially increasing the cost of bank bailouts to the taxpayer.

The Federal Reserve recently issued regulations targeting practices in the credit card industry. While this regulation was itself overkill, it should be given an opportunity to work, and be modified if it results in significant contraction of credit. It is far easier to go back and change harmful regulations than legislation.

Robert H. Frank, A 200% Tax Even Socialists Will Hate

In the latest issue of Forbes, Cornell University economist Robert H. Frank is pushing “A Tax Even Libertarians Can Love.” I hope he wasn’t counting on this libertarian’s support.

What he advocates is “replacing the income tax with a progressive tax on spending. …A family’s income minus its savings is its consumption, and that amount minus a large standard deduction – say, $30,000 a year for a family of four – would be its taxable consumption. …Rates would start low, perhaps 20%, then rise gradually with total consumption. …With savings tax-exempt, top marginal tax rates on consumption would have to be significantly higher than current top rates on income.”

His concept of “significantly higher” includes tax rates of 100-200% on marginal income that isn’t saved.  This is about minimizing affluence, not maximizing revenues.  There is ample evidence from Emmanuel Saez and others that the amount of reported income drops sharply as marginal tax rates rise above 25-30% (and even less on capital gains).

In his 2007 book, Falling Behind: How Rising Inequality Harms the Middle Class, Frank suggests marginal tax rates of 50% above $220,000  and rising to 200%.  Since seniors (like me) commonly finance retirement from past savings, Frank’s tax scheme amounts to rapid confiscation of past savings.

For young people, Frank’s tax can’t possibly encourage savings because it discourages earning any income in the first place.  Consumption is, after all, the motive for both earning and saving.   The prospect of facing future consumption taxes of 50-200% would surely discourage saving much, because the rewards from invested savings (namely, future consumption) would be subjected to such prohibitive tax brackets. Under this steeply progressive tax on unsaved income, any income exempt from taxes today would be subject to brutal taxes whenever folks wanted to buy anything of value, like a car or house, or to retire on their accumulated savings.

In another April 25 piece in The New York Times, Mr. Frank shifts from promoting confiscatory taxes on consumption to defending small tweaks to the current tax regime. “The current [tax] system is much fairer than many people believe, and the president’s proposal will make it both fairer and more efficient.” That comment was aimed at the tea parties.  Yet tax party protesters clearly understood, as Frank does not, that the president’s first wave of proposed tax increases come nowhere near paying for his grandiose spending plans.  My estimate of last October, that Obama’s plans would add $4.3 trillion to the deficits over ten years is now looking much too generous, if not wildly optimistic.

In the New York Times piece, Frank argues that income differences are mainly a matter of luck.  As he often does, Frank pretends to possess evidence about this topic that other economists have missed.  He says, “economists have only begun to realize [that] pay differences often vastly overstate differences in performance.”

In his book, whenever Frank alludes to what “the evidence suggests,” his sources are usually suspect, obsolete or invisible. He claims “regulations, like cartoons are data.”  He cites an unpublished master’s thesis, unidentified surveys and “casual impressions.”

Frank  claims “happiness can be measured reliably” by brain waves.  Explaining this better in the Economic Journal in 1997, he noted that people who say they are happy show “greater electrical activity in the left prefrontal region of the brain” which “is rich in receptors for the neurotransmitter dopamine, higher concentrations of which been shown independently to be correlated with positive affect.”  If we accept the amount of dopamine in the brain as the gauge of happiness, however, then the happiest people are those who routinely abuse crack and meth.

In the second chapter of Falling Behind, his first graph lists a Census Bureau URL as the source for household income data from 1949 to 1979.  Click on that link and you will find the data only go back to 1967.   In reality, all of Frank’s income and wealth graphs actually came from Chris Hartman at inequality.org. Hartman is not an economist or statistician, but a “researcher, writer, editor, and graphic designer with experience in politics, higher education, and publishing.”  Hartman’s non-facts used in Robert Frank’s first graph actually came from a 1994 book from the Economic Policy Institute, reflecting the “authors’ analysis…  of unpublished census data.” Frank’s comparison of CEO pay with “average wages” came from Hartman’s flawed calculations for United for a Fair Economy, which were critiqued on page 131 of my textbook Income and Wealth. And Frank’s demonstrably false claim that “asset ownership has become even more heavily concentrated during recent years” is likewise from inequality.org.

In short, Professor Frank often bases his remarkably strong opinions on fragile facts.