Topic: Regulatory Studies

Paduda Cuts (Closer) to the Heart of the Matter…

…when he responds to my post thus:

I think this is because libertarians don’t believe in health insurance as a means to help people with health conditions pay their bills.

I would put it this way:

Insurance is a voluntary arrangement where consumers agree to subsidize each other. By definition, sick people have higher medical expenses. Thus, some seek to charge healthy people more than they cost to insure, so that insurers can reduce the premiums they charge to the sick.

There are lots of reasons why healthy people may agree to that. They may be very risk-averse, and so they are willing to pay more than they cost to insure. They may be altruistic, deriving satisfaction from knowing that their higher premiums are making coverage more affordable for others. Or they may precommit to such subsidies before it is known who in the insurance pool will develop a chronic illness (read: guaranteed renewable insurance).

As a libertarian, I have no problem with the healthy subsidizing the sick via private health insurance — so long as the arrangement is voluntary. But problems arise when public policy tries to get healthy consumers to provide, shall we say, “extra-voluntary” subsidies:

  • The healthy people eventually figure out that they are being over-charged, and they bolt. That makes the risk pool less-healthy, premiums rise, and more healthy people leave. Lather, rinse, repeat, and you’ve got your very own adverse selection death spiral.
  • The insurers realize they can’t make money off the sick people, so they avoid diabetics and such as if they had the plague. 
  • And it doesn’t help the situation that forced subsidies lead to greater moral hazard among the very people who already use lots of medical care. That just fuels the first two responses.

So to tweak Paduda’s characterization, libertarians think private insurance is a wonderful vehicle for voluntary subsidies and a lousy vehicle for forced subsidies.

In a world without such forced subsidies, Paduda is correct that we would purchase a lot less health insurance. And I find this comment instructive:

[I]nsurance would not be available at any kind of affordable price for anyone who really needs it if Cannon’s prescription becomes reality” [emphasis in original].

Sick people don’t need insurance. Insurance doesn’t make sick people healthy. They need medical care. They may even need subsidies. So why not try to provide them those things, rather than wreck the markets for both health insurance and health care?

Many equate insurance with subsidy. In fact, one is a subset of the other.

Much Regulatory Ado about Nothing?

This story has all the makings of a Shakespearean comedy: a public watchdog asleep at the switch, a scorned woman, and the silliness of politics.

(OK, I’m hyping a post about regulation. But really, the other elements are in here and it’s a good tale. So keep reading.)

SLEEPING WATCHDOG   Last January 18, President Bush quietly approved major changes to the federal regulatory review process. Federal agencies will now be required to offer greater justification for new regulations, estimate those regulations’ costs and benefits, and the White House will have oversight of agencies’ quasi-regulatory “guidance documents,” which until now have been largely free from executive review.

The changes initially went unnoticed by the media — almost. Lauren Morello of the energy & environment trade publication Greenwire (subscription required) ran a good article the next day (full disclosure: I was one of her interviewees). But, unless I missed it, none of the major media reported the story.

None, that is, until this week. On Tuesday, Bloomberg Media’s Cindy Skrzycki dutifully reported the changes in her column “The Regulators.” The same day, the New York Times ran the story front-page, above-the-fold. But for more than a week, the major policy change went unnoticed by the press, other than Greenwire. And, I might add, Greenwire did by far the best job of explaining the new policy’s substance and controversy.

THE SCORNED WOMAN   The policy change has been attributed to new White House regulatory affairs adviser Susan Dudley. Dudley came to national attention last summer, when President Bush nominated her to head the Office of Information and Regulatory Affairs (OIRA), a small but very important part of the Office of Management and Budget. At the time, Dudley was directing the Regulatory Studies Program at George Mason University’s Mercatus Center, and she has contributed a number of articles to Cato’s Regulation Magazine. (For a fun read, see her short article “A Regulated Day in the Life” from the Summer 2004 issue.)

Dudley’s nomination was met with considerable controversy, and even nastiness, reminiscent of the earlier OIRA fight over Harvard professor John D. Graham. Graham was ultimately approved by the Senate, but Dudley’s nomination never received a committee vote.

I have read some of Dudley’s work, and I’ve found it to be well reasoned and illustrative of issues of legitimate concern — even though I’ve sometimes disagreed with her conclusions. OIRA’s job, as I interpret it, is to scrutinize regulatory agencies’ proposals and require the agencies to justify why they would restrict people’s interactions and impose costs. Such scrutiny is, after all, part of deliberative policymaking. Perhaps Dudley’s scrutiny would have been unreasonably difficult, but a good OIRA chief would certainly ask the tough questions that Dudley’s analyses raise.

THE NEW POLICY   Technically, what President Bush did on Jan. 18 was issue Executive Order 13422, amending President Bill Clinton’s Executive Order 12866. EO 12866 pushes federal regulatory agencies to consider the costs of the various regulations they propose, and to examine alternative regulations that could accomplish the same goals at lower costs. EO 12866 also places several transparency and openness requirements on the regulatory process. Finally, EO 12866 gives OIRA a regulatory review role — albeit a less muscular one than what OIRA had under President Ronald Reagan’s Executive Order 12291. (For more on OIRA and EO 12866, read Dudley’s “Bush’s Rejuvenated OIRA” from the Winter 2001 Regulation.)

The new Bush amendments make four important changes to EO 12866:

  1. Regulatory agencies will have to identify what “market failure” a proposed regulation is intended to address. In other words, an agency will have to explain why the “problem” addressed by the proposed regulation cannot be solved through private action.
  2. Agencies must give some estimate of the aggregate costs and benefits of their regulations.
  3. Guidance documents, which give informal direction for how to comply with various federal regulations, will have to undergo OIRA review if they are considered “significant.”
  4. A political appointee in each agency will have oversight of that agency’s regulatory process.

The first amendment should be unobjectionable, at least on a theoretical level. ”Market failure” is the fundamental justification for government regulation (e.g., pollution should be regulated because no one “owns” the environment), so requiring a regulating agency to cite the relevant market failure when proposing a new regulation seems an appropriate requirement. Indeed, this requirement was part of the original EO 12866 and of President Ronal Reagan’s previous EO12291, but compliance with the requirement has been weak. That is unfortunate, because clearly identifying the market failure should help agencies to formulate effective and efficient regulations.

Likewise, the second amendment seems unobjectionable, at least in theory. Most citizens assume (incorrectly, it turns out) that government regulations undergo and pass a cost-benefit test. Requiring an estimation of the aggregate costs and benefits of regulation would help to ensure that regulation produces a net gain in public welfare — which, I take it, is the ultimate goal of regulation.

The third amendment involves guidances, a broad category of agency-issued documents that try to explain the application of various statutes and regulations. Guidances lack the force of law and also are not subject to the sort of rigorous review process that regulations are. Guidances are thus subject to a number of complaints, including that agencies do not adequately identify the documents as “advisory” and thus not having the force of law, and that agencies improperly use guidances as a way to expand government’s regulatory reach while avoiding the scrutiny of regulatory review. Those concerns are supposed to be addressed by the amendment’s subjecting “significant guidances” to OIRA scrutiny.

Finally, the fourth amendment is intended to put the regulatory process more under the control of the President. A justification for this change is that the public is better served if greater regulatory responsibility is taken by the appointees of an elected official than by career civil servants.

SILLY POLITICS   But is this shift in regulatory responsibility such a good thing? And, indeed, don’t each of the amendments put regulation more under the control of politicians? A good cost-benefit analysis or thoughtful consideration of market failure would certainly improve the regulatory process, but if politicians are in charge of the analysis (whether a President Bush or, say, a President Al Gore), could we trust the analysis they produce?

To be honest, I’m not sure whether we’d be better served by having the politicians, or the bureaucrats, lead the regulatory state. And I’m also not sure that the fight over EO 12866 matters.

In the Fall 2006 Regulation, New York Law School professor and environmental lawyer David Schoenbrod tells the disturbing story of the Environmental Protection Agency’s Faustian bargain. Schoenbrod claims that Congress created the EPA to be a whipping boy, making the difficult decisions and absorbing the abuse that Capitol Hill’s politicians want to avoid. Congress gets the accolades for voting to “save the environment”; the EPA gets the nightmare of figuring out how to do it, how much of it to save, and who absorbs the cost. And the EPA suffers the wrath of angered environmentalists and industrialists.

I would extend Schoenbrod’s analysis to all regulatory agencies: Congress is supposed to oversee the laws and consider the difficult tradeoffs implicit in regulation. But, because Congress has abdicated its duty, regulatory analysis has fallen to the White House and/or the federal bureaucracy — a situation that serves no one particularly well.

And what is more, it may not really matter whether the White House mandates additional regulatory analysis or who carries it out. As Rutgers University’s Stuart Shapiro argues in the Summer 2006 Regulation, the findings of regulatory analysis have surprisingly little effect on a proposed regulation; what seems to matter is the White House’s position on the regulation. If the White House likes the regulation, the regulation usually gets adopted regardless of the analysis; if the White House dislikes the regulation, it usually gets abandoned regardless of the analysis.

Despite the immense blood-feud over it, regulatory analysis seems to have neither produced the rational, low-cost regulatory paradise that proponents envisioned, nor the misery-plagued wasteland that opponents decried. Instead, as Cato chairman Bill Niskanen has cynically observed, regulatory analysts produce a bunch of lonely numbers that the politicians usually ignore. I suspect Bush’s EO 12866 amendments will produce more of the same — which is to say, the current brouhaha is much ado about nothing.

[Hat tip to Dr. Richard Belzer for correcting my description of EO 13422’s second amendment. You can read Dr. Belzer’s thoughts on EO 13422 at www.neutralsource.org.]

Even Leftists Recognize that Over-Regulation Is Hindering U.S. Competitiveness

A report commissioned by New York Senator Charles Schumer and New York City Mayor Michael Bloomberg concludes that over-regulation is harming American competitiveness, with New York City being disproportionately impacted.

The most intriguing proposal in the report is the call for an optional federal charter for insurance companies. These companies currently are chartered by states, and state politicians abuse this process with mandates and other forms of regulation. An optional federal charter (similar to what exists in the banking sector) would force competition among regulators and create incentives for a more sensible system. That’s the good news.

The bad news is that the report also expresses sympathy for global regulations, which almost surely would mean politicians and bureaucrats insisting that all nations accept excessive regulation. Indeed, the International Organization of Securities Commissions (IOSCO) already is trying to impose a one-size-fits-all system on the world – an approach that would penalize jurisdictions with dynamic financial service industries, such as Hong Kong, Bermuda, and Cayman Islands (see here and here for more information). Tax-news.com reports on the new study:

United States Senator Charles E. Schumer and New York City Mayor Michael R. Bloomberg have released a report which warns that New York could lose its status as a global financial market within a decade without a major shift in public policy. Schumer, a New York Democrat, and Bloomberg, together with New York Governor Eliot Spitzer, warned that New York’s financial markets, stifled by stringent regulations, and high litigation risks, are in danger of losing businesses and high-skilled workers to overseas competitors, relegating New York to regional market status and adversely impacting the US economy. …Senator Schumer and Mayor Bloomberg commissioned the joint report, “Sustaining New York’s and the US’s Global Financial Services Leadership,” which sets out a series of recommendations to counter emerging threats to the United States’ position as the world’s financial leader, with a two-tiered package of national and local measures aimed at removing impediments to financial services competitiveness both domestically and internationally. The report warned that the United States would miss out on between $15 billion and $30 billion in financial services revenues annually by 2011 if the current situation goes unchanged. According to the joint report, while many of the causes are due to improved markets abroad and sophisticated technology that has virtually eliminated barriers to the flow of capital, a significant number of the causes for America’s declining competitiveness are self-imposed. …The report also noted that a complex and sometimes unresponsive regulatory framework has not only prompted many foreign firms to stay out of the US markets, but also is forcing more business overseas because of the complexity and cost of doing business in US financial markets regardless of where they are located.

Taxing the Future

Today’s New York Times reports that Illinois is seriously considering selling off its state lottery and converting the future cash flow into a current lump sum plus a smaller cash flow over the next 75 years.  Gambling, of course is not an economic development strategy.  Excess profits exist only because the state restricts entry.  Like the mercantile regimes of old, the state is raising cash by selling off its monopoly.

Given the numbers in the Times, I conducted some present value calculations.  The sale is projected to result in a cash flow of $200 million per year for 75 years to the state (current profits are $430 billion).  The remaining cash flow goes to the winning bidder.  The reported estimated bid for this franchise is approximately $1 billion.  That suggests a return on investment of 20% per year compounded over 75 years.  Seems rather steep to me.  A 5% return would result in a much higher bid of $3.9 billion.

If the $1 billion is an accurate reflection of what an auction would yield, then the market is telling us that there is large risk to investing in a business whose only asset is state restrictions on entry.  This is particularly true because of the possibility not only of actual physical entry in Illinois, which is less likely, but entry through the internet.

Gambling markets are not the only markets whose source of profits is state enforced entry restriction.  Some years ago Richard Sansing and I studied the difference between the lease prices and sale values of taxi medallions in New York City (Journal of Policy Analysis and Management volume 13 issue 3 (1994) pp. 565-570).  We found that the market acted as if there was a 5% chance of deregulation in any year (i.e. the market was pricing the asset as if its cash flow would be zero in year 21).

Why are states selling assets for their cash flows?  Spending a billion dollars now rather than $630 million every year (the current profits of the lottery) allows today’s politicians to appear generous.  But my suspicion is that they are taxing the only thing left to tax i.e. people in the future.  My colleague Jagadeesh Gokhale’s work in entitlement reform argues that Social Security and Medicare are policies that redistribute from all future generations to current and past generations.  Politicians do this because the future is the last unorganized group in society.  I think some of the same politics are behind the Illinois lottery financial proposal.  But ironically the inability of the political system to credibly commit to future policies reduces the value of the sale to the current era because the market includes political risk in its valuation.         

Those Who Sell Out Will Eventually Be Punished

In a sick way, I’m enjoying the debate over price controls for prescription drugs under Medicare Part D. Of course, I don’t want Congress to dry up the stream of drugs that will keep me alive and vigorous when I’m a geezer. It’s just … what were the Republicans and the drug companies thinking when they created Part D? What did they think would happen? Did they really believe that, if they’d create this program, Congress would never impose price controls?

As I argued on TV today, Part D has Congress buying — through the middleman of the private drug plans — a product with high research and development costs and low marginal costs. And Congress buys those drugs for a politically powerful group of citizens (the geezers). That kind of setup cannot last. The temptation for Congress to pay nothing more than the marginal costs will be inexorable, because doing so pleases constituencies that are paying attention (seniors and current taxpayers) and harms only those constituencies that are either unpopular (drug manufacturers) or else aren’t paying attention (future seniors, including those not yet born).

The writing is on the wall. It may not happen this year, but unless we scrap Part D, sooner or later we will get price controls on seniors’ prescription drugs.

So let’s scrap Part D.

What? You’re a Republican who voted for Part D, against conscience and better judgment?? And now you’re afraid to scrap Part D for fear of (gasp!) flip-flopping or offending the geezers?? Then start talking about fundamental Medicare reform, buddy. And start now.