Topic: Regulatory Studies

Fisking Romney

I watched the Republican presidential candidates’ debate last night, and darn it if that Mitt Romney isn’t an attractive speaker. If you didn’t know anything about health care or the reforms he enacted in Massachusetts, you’d think he had that problem licked. 

So here’s a reality check.  What Romney said about health care (according to the New York Times) appears in bold italics.

“[In Massachusetts,] we said: ‘You know what? We [have] got to find a way to get everybody insured….’”

Here, the candidate reveals his desire to do something that is 100 percent impossible. To be clear: It is impossible to give everyone health insurance

Some people with known, high-cost conditions are uninsurable. So even if you claim you are providing “insurance” to an uninsurable person, you are not, because it’s only insurance if there is uncertainty about whether a subsidy will be needed. If there’s no uncertainty, it’s just plain subsidy — not insurance. 

Markets don’t provide “insurance” to uninsurable people. Only government does that. So when people say they want to “get everybody insured,” rest assured, they are about to propose more government.

“And the last thing we want is to have the government take over health care, because anything they take over gets worse, not better….”

I agree with this sentence, because it completely contradicts the sentence that came immediately before it. 

“We’re not going to turn to Washington, because Washington makes a mess….”

Actually, a significant portion of the funding for RomneyCare came from Washington. Indeed, it was because Washington was about to yank $385 million in Medicaid funding that Massachusetts turned to Washington with a plan to keep that money flowing. Sure did make a mess, though — no argument there.

“We said: ‘We need to find a way to get everybody in our state insured with private insurance….’”

Funny, that’s exactly what Hillary Clinton tried to do in 1993.  

“The half a million who didn’t have insurance, all the people worried that if they lost their job, they’d lose insurance — we said we got to find a way to get them insured without raising taxes….”

RomneyCare imposed a slew of new taxes. Romney’s defenders like to claim that the plan did not include a broad-based tax increase. But it did increase government spending, which is essentially the same thing. 

“…without a government takeover…”

The government can take over your health care by taxing you and spending your money itself, or by forcing you to spend your money how it wants. The latter is what Romney did.  Either way, the government is taking over.

“…and that’s what we did.”

Really? And here I thought the Massachusetts “Connector” bureaucracy explicitly and unanimously decided not to cover 20 percent of the Bay State’s uninsured.

“It relies on personal responsibility….”

Personal responsibility means that you bear the cost of your decisions. But RomneyCare allows people to push the cost of their bad decisions (smoking, poor diabetes prevention and management, etc.) onto others. RomneyCare thus relies on collective responsibility. Romney consistently confuses the two.

“Every Democrat up there’s talking about a form of socialized medicine, government takeover, massive tax increase….”

True enough. But it’s not just the Democrats.

“We get people that were uninsured [covered] with private health insurance….”

Nominally private health insurance, yes. Just like Hillary proposed.

“We have to stand up and say the market works. Personal responsibility works….”

If they work, why abandon them?

“We’re going to have insurance for all of our citizens they can afford, that’s theirs, that’s portable. They never have to worry about losing it….”

Not quite. The only good thing about RomneyCare is that it may give workers more health insurance choices, and let them keep their insurance when they change jobs. The federal tax break associated with job-based coverage traditionally has made that impossible. 

But insurance would not be so portable for those who don’t get another job. In that case, RomneyCare will let you keep your insurance, but the cost could rise 80 percent because you’d lose that tax break. Losing your insurance would be really easy under those circumstances.

Romney’s defenders would say (1) that’s always been the case, and (2) you can’t change that problem at the state level — only Congress can change the federal tax code. But that’s exactly the point. 

The whole premise of RomneyCare and its “Connector” is that a state can undo the damage wrought by federal tax laws. An honest appraisal of RomneyCare belies the folly of that premise. For Massachusetts to mitigate the damage done by federal tax laws — even slightly — required (A) creating a new government bureaucracy, (B) increasing government spending, and (C) imposing new taxes. 

The fundamental flaw of RomneyCare is that conservatives tried to use state law to fix problems created by federal law. The Constitution just doesn’t work that way. RomneyCare is a net minus for freedom because it expanded government at the state level and distracted free-market advocates from pushing for real reform at the federal level. It continues to do so.

I was glad to see that the New York Times’ transcript picked up the comment of an unidentified candidate who responded to Romney’s claim of having covered all the uninsured with: “I’m told that’s not true.  Actually, Wolf, that’s not true.” Watching the debate, I thought it was Rudy Giuliani who said it. That would make sense: he had the soundest approach to health care of all the candidates.

Crocko, Part 2

Michael Moore is promoting his movie Sicko on the Oprah Winfrey Show today.  I found the following quote from Moore on Oprah’s web site:

The law demands and requires that a corporation like a health insurance company maximize the profits for the shareholders, and if they don’t do that, they’re violating the law. … If they are required by law to make a profit, and the only way they can make a profit is by denying claims or cutting people off of their insurance or never taking them on in the first place, then that’s not good for us.

Huh??  Exactly what law is he talking about?  Aren’t a lot of HMOs – the real care-deniers of the private sector – explicitly non-profit entities?  And don’t government programs like Medicaid (hardly a for-profit concern) also deny access to covered services?

As I’ve said before:

I’m actually looking forward to agreeing with Sicko about how the U.S. health care sector is bloated and inefficient, and how health care providers routinely rip off taxpayers. But I can’t help this feeling that Moore is going to recommend that we turn that mess over to a sector of the economy that is even larger, even less efficient, and an even bigger rip off.

There is No Entitlement to a Government-Created Monopoly

Local governments routinely set up taxi cartels, limiting the number of cabs in order to boost profits of (and campaign contributions from) owners. As George Will explains in the Washington Post, one plucky immigrant, with help from the Institute for Justice, has managed to break the cartel in Minneapolis. In response, the cartel is claiming that the loss of their entitlement to monopoly profits is akin to a regulatory taking. Will concludes by stating it would be a good idea if the people who think that they have a right to use government coercion to obtain unearned wealth would leave the country as entrepreneurial immigrants arrive:

Paucar, 37, embodies the best qualities of American immigrants. He is a splendidly self-sufficient entrepreneur. And he is wielding American principles against some Americans who, in their decadent addiction to government assistance, are trying to litigate themselves to prosperity at the expense of Paucar and the public. …In 1937, New York City, full of liberalism’s itch to regulate everything, knew, just knew, how many taxicab permits there should be. For 70 years the number (about 12,000) has not been significantly changed, so rising prices have been powerless to create new suppliers of taxi services. Under this government-created scarcity, a permit (“medallion”) now costs about $500,000. Most people wealthy enough to buy medallions do not drive cabs, any more than plantation owners picked cotton. They lease their medallions at exorbitant rates to people like Paucar who drive, often for less than $15 an hour, for long days. … Paucar moved… Unfortunately, Minnesota has a “progressive,” meaning statist, tradition that can impede the progress of people like Paucar … 343 taxis were permitted. He wanted to launch a fleet of 15. That would have required him to find 15 incumbent license-holders willing to sell their licenses for up to $25,000 apiece. …[He] helped persuade the City Council members, liberals all (12 members of the Democratic Farmer-Labor Party, one member of the Green Party), to vote to allow 45 new cabs per year until 2010, at which point the cap will disappear. In response, the cartel is asking a federal court to say the cartel’s constitutional rights have been violated. It says the cap – a barrier to entry into the taxi business – constituted an entitlement to profits that now are being “taken” by government action. …By challenging his adopted country to honor its principles of economic liberty and limited government, Paucar, assisted by the local chapter of the libertarian Institute for Justice, is giving a timely demonstration of this fact: Some immigrants, with their acute understanding of why America beckons, refresh our national vigor. It would be wonderful if every time someone like Paucar comes to America, a native-born American rent-seeker who has been corrupted by today’s entitlement mentality would leave.

Schumer’s 0.15 Cent Solution

On Wednesday, the Joint Economic Committee held hearings on gasoline prices and whether they are on the up-and-up. Sen. Chuck Schumer (D-N.Y.), the committee chairman, made his position — and the position of many of his fellow senators — perfectly clear. The oil companies should be busted up, he said, and lower prices will naturally flow.

Really? The best witness he had on hand to back him up was Thomas McCool, director of applied research methods at the U.S. Government Accountability Office (GAO). McCool contended that mergers and acquisitions in the oil sector in the 1990s have increased wholesale prices by 1-7 cents per gallon. Now, it would appear on its face that tossing the economic equivalent of an atomic bomb into the oil sector to reduce wholesale prices by a few pennies a gallon might not be the best idea in the world. Nonetheless, a close read of McCool’s testimony suggests that it’s an awfully thin reed to hang public policy on.

The first thing we notice is that McCool’s testimony relied exclusively on past GAO reports. The fact that there is a mountain of peer-reviewed academic work on this subject was unacknowledged in his testimony. This, unfortunately, is par for the course at the GAO. The implicit attitude over there is “if we didn’t do the study, the study isn’t worth looking at.” As a consequence, most GAO analysts are horribly ignorant about many of the issues they discuss. Now, I don’t know if Thomas McCool is familiar with the economic literature on these questions or not, but given his job title, I would doubt it.

Luckily, not all federal agencies act as if they are the font of all conceivable wisdom. The Federal Trade Commission recently published a thorough study on oil markets with due attention paid to the external literature on the subject. In a paper commissioned for that study from University of Iowa economist John Geweke, we find that academic researchers have been unable to lay down any good evidence that mergers and acquisitions have, on balance, increased consumer prices,” a finding all the more telling given the higher quality of that work. As Geweke notes in passing regarding an earlier GAO study on mergers and acquisitions in the oil business, which used roughly the same methodology as the more recent study, “assessment of the technical work in the GAO report is hampered by the fact that the report’s documentation of data and estimation methods does not generally meet accepted academic standards.” Geweke’s criticism was echoed in the FTC’s analysis of GAO’s 2004 study, which was savaged [pdf] by the commission’s economists (see the appendix).

Second, it’s important to note the distinction between changes in posted rack prices (which is what GAO used to reflect wholesale prices) and retail prices. The two are not the same. As the staff of the Bureau of Economics of the FTC noted back in 2004,

Rack wholesale prices and retail prices do not always move together, in part because rack prices do not necessarily measure actual wholesale transaction price, which are also affected by discounts, and in part because significant quantities of gasoline reach the pump without going through jobbers.

Hence, GAO did not find that retail pump prices increased by 1-7 cents per gallon. I didn’t even find that wholesale prices increased by 1-7 cents per gallon. It purported to find that posted rack prices increased by 1-7 cents per gallon. That may - or may not - have increased retail pump prices. FTC economists, for instance, agree with GAO that the Marathon-Ashland merger increased posted rack prices, but found no evidence that retail pump prices increased as a result.

In sum, what GAO found is equivalent to finding that this or that led Ford to increase the suggested retail price of a car by x. Maybe it did, but that “suggested retail price” has little to do with actual prices paid by new car buyers on car lots. Did McCool make this distinction clear? Not on your life.

Third, McCool’s depiction of GAO’s 2004 findings is highly suspect even in the particulars. The 2004 GAO study that McCool relied upon for his claims actually were two separate studies packaged under one binding.

One analytic exercise provided a total of 10 estimates of the effects of mergers and acquisitions on posted rack prices. Those estimates cover three types of fuel (conventional, reformulated, and specially blended gasoline for the California market) and different geographic areas. Seven of the 10 estimates — all involving either conventional or reformulated gasoline — found that mergers and acquisitions increased wholesale fuel prices by 0.15 cents per gallon to 1.3 cents per gallon. Although mergers and acquisitions were found to increase wholesale California gasoline prices by 7-8 cents per gallon, that finding was not at a level of confidence normally thought of as statistically significant. And interestingly enough, the GAO study did not find a statistically significant increase in wholesale gasoline prices in the eastern part of the United States.

Another analytic exercise examined eight of the 2,600 mergers and acquisitions that occured between 1994-1999. GAO provided 28 estimates of the effects of those mergers on posted rack prices for branded and unbranded conventional, reformulated, and California-specific gasoline. In 16 cases, GAO found a positive and statistically significant impact on posted rack prices ranging from 0.4 cents per gallon to 6.9 cents per gallon. In seven cases, they found a negative and statistically significant effect, ranging from a price decline of 0.4 cents per gallon to 1.8 cents per gallon. In five other cases, they found no statistically significant effects at all.

Yet McCool glosses over these more careful observations in his oral presentation for the more arresting “1-7 cents per gallon” impact estimate. Media coverage might have been somewhat different had McCool said that GAO found no evidence that mergers and acquisitions have increased posted rack prices in the eastern half of the United States, but some evidence to suggest that mergers and acquisitions increased posted rack prices by somewhere between 0.15 and 3 cents per gallon in the western half of the United States (the findings of the more comprehensive study of the two undertaken by GAO) … but that posted rack prices and a quarter will buy you a cup of coffee for all the good they will do the analyst because posted rack prices and retail prices are two different things. But that wouldn’t have made the members of the committee very happy, and GAO is not in the business of going out of its way to offend the people funding their operations.

In McCool’s defense, at the back of the written testimony he submitted to the committee, he breaks down the study’s findings by merger. According to GAO, the Exxon-Mobil and Marathon-Ashland mergers increased posted rack prices by 2 cents per gallon and reformulated gasoline (posted rack) prices by 1 cent per gallon. The Shell-Texaco merger, however, reduced reformulated gasoline (posted rack) prices by about a half cent per gallon. The Tosco-Unocal merger increased California gasoline (posted rack) prices by 7 cents per gallon.

A note about the Tosco-Unocal merger that provides the upper-bound estimate offered by Mr. McCool - the GAO finding pertains to the (posted rack) price of branded gasoline. The (posted rack) price of unbranded gasoline was actually found to decline. Economists at the FTC note that

Tosco had a branded presence in few of the cities affected by the merger and, where it did, Unocal typically did not have a significant branded presence. Under these circumstances, it is virtually impossible to imagine an anticompetitive theory that would be consistent with a large increase in branded prices but no increases in unbranded prices. Had the GAO researchers understood this problem, they would have recognized that their result must be flawed.

Fourth, McCool’s discussion of the mergers and acquisitions in the 1990s leaves much to be desired. For instance, 2,600 mergers and acquisitions are dutifully noted without the proper context. To wit, the mergers and acquisitions occurred because oil companies were hemorrhaging red ink due to historically low oil prices. Many of these companies simply could not survive on their own. Thus, the mergers and acquisitions. That is a vital aspect of the story that colors the mergers and acquisitions in a far different way than they are being colored by “the trust busters.”

McCool testified that increased consumer prices that followed from a merger can either be good or bad. Mergers will prove bad, he said, if they allow companies to exercise market power. Mergers will be good, however, if they allow for more efficient operations. Unfortunately, he does not tell us whether the mergers and acquisitions in the 1990s that he flagged as having driven up price were “good” or “bad.”

That aside, this sort of argument is a primitive construct. If a merger or acquisition improves efficiency, it will give that company greater pricing power by definition, so this isn’t an “either/or” game. Nonetheless, the observation that it might well be economically healthy if a merger increased fuel prices is quite important and well worth making in a more aggressive manner than it was in the testimony.

Fifth, McCool’s riffs about the oil market were so dodgy that one gains little confidence in GAO’s ability to sort any of these issues out. For instance, McCool contends that domestic refining capacity has not expanded enough to keep pace with demand. I don’t know what that is supposed to mean. Demand for gasoline is only manifested in response to price. If gasoline prices were zero, demand would be nearly infinite. If prices are around $3.00 per gallon, demand for gasoline would be less. So McCool can only be arguing that we don’t have enough domestic refining capacity to meet demand given current prices. Well, that’s flatly wrong. We do indeed have enough gasoline to go around given today’s price. If it were otherwise, service stations would be shutting down because they could not get enough gasoline from wholesalers to keep the pumps flowing. Obviously, they do.

McCool buttresses his contention that refining capacity is seriously constrained by noting that no refinery has been built in the United States since 1976 and then making a big deal of the fact that utilization rates have increased from 78% in the 1980s to 92% in the 1990s. But those observations prove nothing. Regarding the former, investors find it a lot cheaper to expand capacity in existing refineries than to build new refineries altogether - and that’s what they’ve been doing. Regarding the latter, high utilization rates = efficient operations. Excess refining capacity means capital is being wasted. It’s certainly true that if we had more slack refining capacity that we could respond to unexpected supply disruptions more quickly, but it costs money to maintain that reserve and McCool offers no analysis to suggest that this sort excess refining capacity “insurance policy” would be a good buy.

Another example: McCool observes that gasoline inventories are low and then spends some time discussing why the industry is generally inclined to minimize inventory levels as a cost-savings device. This is true enough, but is not particularly pertinent to the present situation. Inventory levels over the three month period of February - April 2007 fell by 15 percent, the steepest drop in history. EIA reports that this occurred because of labor strikes in Europe that disrupted fuel imports and an unusually large degree of refinery maintenance of late. In short, McCool told the wrong story.

McCool also indulged in the kinds of things that constantly grate on the nerves. For instance, he contends that “most of the increased U.S. gasoline consumption over the last two decades has been due to consumer preferences for larger, less-fuel efficiency vehicles ….” This is true in a sense but is a reflection of the underlying fact that real (inflation adjusted) gasoline prices in the 1990s were the lowest in U.S. history. Consumer preferences for gas guzzlers didn’t come out of the clear blue sky. Accordingly, it would be more accurate to say that “most of the increased U.S. gasoline consumption over the last two decades has been due to historically low gasoline prices in the 1990s.” But that would have been less pejorative.

GAO’s analysis is a lot less helpful to the mob than one might think given the number of times it has been offered up as a rationale for Hugo Chavez-style assaults on the U.S. oil sector.

Gore Outrage on Larry King: Some Inconvenient Facts

Here’s the transcript of a Q/A by Al Gore last night on Larry King Live

UNIDENTIFIED FEMALE: Vice President Al Gore, what issues caused by climate change globally are likely to affect the United States security in the next 10 years?

KING: Al?

GORE: You know, even a one-meter increase, even a three-foot increase in sea level would cause tens of millions of climate refugees.

If Greenland were to break up and slip into the sea or West Antarctica, or half of either and half of both, it would be a 20-feet increase, and that would lead to more than 450 million climate refugees.

The direct impacts on the U.S. have already begun. Today, 49 percent of America is in conditions of drought or near drought. And we have had droughts in the past, but the odds of serious droughts increase when the average temperatures go up, as they have been going up.

We have fires in California, in Florida, in other states, unprecedented fire season last year, directly correlated with higher temperatures, which dry out the soils, dry out the vegetation.

We have a very serious threat of losing enough soil moisture in a hotter world that agriculture here in the United States would be greatly affected. Now, the list is too long to give you here, but look, these issues are more important that Anna Nicole Smith and Paris Hilton, and they are not being talked about.

FACT 1. There is not one shred of evidence in the refereed scientific literature speaking of a three-foot increase in sea level in ten years. The best estimates from the United Nations Intergovernmental Panel on Climate Change range from 0.8 to 1.7 INCHES.

FACT 2. There is no trend towards increasing drought area in the United States that is related to planetary warming. We have good data on drought area back to 1895. The correlation between the area of the U.S. under drought and planetary temperature is statistically ZERO.

FACT 3. As the mean planetary temperature has warmed since 1975, U.S. crop yields have INCREASED significantly, just as they did during the period of cooling from 1945 through 1975, or during the warming from 1910 to 1945.

It is a true outrage that Gore can get away with this on live television and not be called out by the inconvenient facts.

Wisconsin Gas Station’s Prices Are Too Low!

At least, as Dan noted below, that’s the verdict of state regulators, who recently threatened to sue a BP station owner unless he discontinues giving a 2 cent per gallon discount to senior citizens and a 3 cent per gallon discount to boosters of local youth sports programs.

According to Wisconsin regulators, the discounts represent “unfair competition” against other gas stations, and that — get this — imperils consumers. A 1939 Badger State law requires retailers to sell motor fuels at no less than a 9.2 percent markup over the wholesale price.

Wisconsin is not the only state with such a law — a dozen others (Alabama, Colorado, Florida, Louisiana, Maryland, Massachusetts, Missouri, New Jersey, North Carolina, South Carolina, Tennessee, and Utah) have similar provisions to protect gas station owners from the horrors of price competition.

You would think that, amidst the Sturm and Drang of the past few years’ high fuel prices, the public would force lawmakers to throw out this welfare for gas station owners. Alas, no.

Hat tip: Tim Rowland

The Inherent Corruption of Antitrust Laws

Holman Jenkins’ Wall Street Journal column explains that government agencies have a natural – and corrupting – incentive to make decisions that rationalize their existence and increase their budgets. In the case of antitrust decisions, it therefore is not surprising that bureaucrats narrowly define product markets so as to give them an excuse to regulate, litigate, and otherwise interfere with market forces. To be fair, this is not just a public-sector problem. Tax lobbyists and tax preparation practitioners routinely oppose tax reform for the same reason. The unifying problem, of course, is government policy:

Federal agencies have two choices when presented with a merger. They can find a “problem” – in which case their budgets are justified and their walls fill up with scalps. Or they can find no problem. Guess which they do? Take the Federal Trade Commission lawsuit to block a proposed merger of Office Depot and Staples, a close parallel to Sirius-XM. The two would have accounted for just 4% of the office-supply market, but 100% of the market for office supplies purchased from … Office Depot or Staples! Take FTC’s failed attempt to block a deal bringing Häagen-Dazs and Dreyer’s under the same roof, which in a better world would forever have deprived its promoters of the respect of their peers. The agency’s case was built on the premise that “superpremium” ice cream doesn’t compete with, er, ice cream. … Antitrust battles may depend on the illusion of fierce debate about economics, but there’s only one antitrust establishment in Washington whose pre-emptive interest is keeping the charade going. … Even the alarm over Sarbanes-Oxley and its effect in driving listed companies offshore or into the hands of private equity is akin to fretting about tennis elbow when the arm may be amputated. Not when you have Congress eagerly promoting bills to put Congress in charge of deciding foreign investment inflows, to punish energy consumption, to prop up a dying private-sector labor movement and regulate CEO pay.