Yet Another Reason Not to Be Too Enamored of SCHIP

The U.S. health care sector is fundamentally broken.  Yet most reform proposals, including Congress’ plan to expand the State Children’s Health Insurance Program, would just throw more money at the dysfunction without doing anything to fix it.  (Mind you, that suits the health care and insurance industries just fine.) 

Another example of what such reforms won’t fix emerged in this week’s New England Journal of Medicine.  Researchers examined the medical records of 1,500 children and found that the kids received (what the evidence suggests is) high-quality care only 47 percent of the time. 

Similar studies have found that adults receive recommended care only 55 percent of the time.  One of those studies even found that having insurance doesn’t much improve the quality of care that adults receive:

Although having insurance increases the ease of access to the health care system, it is not sufficient to ensure appropriate use of services or content of care. Indeed, within systems where access to care is more equitable … substantial gaps between observed and optimal quality remain.  In the United Kingdom, with universal coverage, a study using our methods found that the overall proportion of recommended health care that was received was similar to what we have reported.

This week’s study on the quality of pediatric care did not compare the quality of care received by insured children to that received by uninsured children.  Nonetheless, the researchers closed with an illuminating comment on the current debate over SCHIP:

Expansion of access to care through insurance coverage, which is the focus of national health care policy related to children, will not, by itself, eliminate the deficits in the quality of care.

Yeah … but … oh, what the hell.  Who’s up for throwing more money at the problem?

Lang on the Army

Former DIA analyst, West Point Arabic instructor, and Vietnam vet Col. Pat Lang has a very interesting post on the future of the army, with an equally interesting discussion (politically incorrect and with some colorful language) in the comments:

This week in Washington, The Association of the US Army (AUSA) held its convention. At that convention the Chief of Staff said that 20 years of conflict are anticipated by the Army. That is bad news for an army that is still wedded to the concept of soldiers as middle class married men with young families. A succession of pious, middle class uniformed leaders created that ideal for America’s army after the Vietnam War. People in today’s army are expected to conduct themselves socially like small town Americans. Drinking, smoking, sexual adventure are all severely sanctioned even in combat zones. Where is the “safety valve” for these guys? A set of mores of that type is not feasible in an army that lives at war in far flung places with often repeated and protracted combat tours. My active duty friends tell me that the “middle class” army is already breaking down as a form. Divorce, family dissolution and other symptoms abound. A different kind of army will emerge from the meat grinder.

Paul Craig Roberts Misses the Mark

In an opinion piece published this week, Paul Craig Roberts takes exception to a conclusion in my recent Cato paper about the state of U.S. manufacturing.  I usually welcome disagreement as an opportunity to elaborate or persuade.  But it’s quite evident that Roberts is not interested in elaboration and is beyond persuasion.  The purpose of his dissent was to construct a straw man against which he could present his skeptical, and empirically refutable, views about trade.  

In my paper, Roberts identifies what he believes is an “extraordinary mistake [which] results in an incorrect conclusion.”  He argues that my failure to distinguish imports produced by U.S. companies abroad (offshored production) from imports produced by foreign firms abroad (import competition) leads me to the erroneous conclusion that “the health of U.S. manufacturing [is attributable] to import competition.”  

First of all, nowhere in my paper do I attribute the health of U.S. manufacturing to import competition.  The only passage from which such an interpretation might be drawn (by a careless reader, I would add) is this one: “Revenues, profits, output, value added, and even compensation rose the most for industries most exposed to import competition, and they rose the least for those industries experiencing the smallest increases in imports.”  That is just a statement of fact, as gleaned from the data.  It assigns no causation to import competition.   

I also write: “Exposure to trade, as evidenced by the relationship between imports and exports and operating performance, has been an important component of the success of U.S. manufacturing industries.”  This statement at least implies some degree of causation, which is supported by the fact that profit growth (operating performance) is a function of revenue growth (expanding exports) and cost reduction (increasing imports of production inputs). 

Second, my failure to distinguish between sources of imports in no way undermines the central points of my paper.  The purpose of my paper (“Thriving in a Global Economy: The Truth about U.S. Manufacturing and Trade”) was simply to evaluate the health of the U.S. manufacturing sector.  The conventional wisdom holds that U.S. manufacturing is eroding, the country is de-industrializing, and that import competition is the driving force behind this trend.  We hear this all the time.  Politicians tell us.  Op-ed page writers remind us.  Lou Dobbs warns us.  And members of Congress have proposed all sorts of punitive trade legislation under the banner of arresting and reversing manufacturing decline. 

I set out simply to assess the credibility of the premise.  My approach was straightforward, honest, and devoid of ideology.  There was no shell game or sleight of hand.  I found the most relevant, comprehensible, comprehensive, objective statistics that speak to the health of the sector, presented those data, and offered conclusions that are easily verifiable (i.e., not confused by economic modeling or econometrics or the debatable assumptions upon which such approaches often rely). 

What the data show very clearly is that U.S. manufacturing is far from declining; it is, in fact, thriving.  Output, revenue, profits, profit rates, return on investment, and exports have all been trending upward since the nadir of the manufacturing recession in 2002 and all reached record highs in 2006.  If that doesn’t constitute “thriving,” I’d be interested to learn what does. 

Since data and trends pertaining to the sector as a whole might mask different conditions in particular industries, I drilled down to explore the health of individual U.S. manufacturing industries (broadly defined at the 3-digit NAICS level).  Out of 18 broadly-defined industries, I found that 12 are doing very well and that 6 are struggling, according to the same metrics used to assess the sector as a whole.  With the exception of the auto industry, those industries that are faring poorly are generally low-technology, low-wage, and labor-intensive. 

With the manufacturing sector and the majority of its component industries found to be doing very well, the purpose of the paper was fulfilled.  The conventional wisdom was refuted.  If manufacturing is thriving – and not declining – then it is moot to demonstrate that trade has not been an important cause of manufacturing decline.  But since trade is so demonized, and the data so exonerating, it was pertinent to describe the relationship observed between trade and the various performance metrics. 

Here are some of my observations:  

  • “the rising level of U.S. imports and exports has been associated with positive developments in key manufacturing performance indicia”;
  • “As manufactured imports declined in 2001 and 2002, manufacturing output, exports, and revenues declined as well.  When imports began to pick up again as the manufacturing recession was ending, all of those real variables tracked upwards, adding more data points to the line that confirms a strong positive correlation”;
  • “As manufacturing imports have achieved new heights, manufacturing output, revenues, exports, and profits have all set records, too.”
  • “The premise that U.S. manufacturing is under duress from imports is not supported by the data”;

It is noted in the paper that industries that experienced higher levels of import growth fared better than industries that experienced lower levels of import growth.  I suggest that access to imported raw materials, components, and capital equipment helps keep the lid on costs of production for U.S. producers.  I mention that 55 percent of all 2006 import value was of intermediate products – precisely those products consumed by industry in its own production processes.  I mention that manufacturing export growth has been strong in recent years and that foreign markets are likely to be even more important to U.S. manufacturers in the year’s ahead since that’s where the dynamic growth is.  All of those conclusions (implications, if you prefer) counsel in favor of treading lightly on the trade protection front. 

The fact that some proportion of U.S. imports might have been offshored U.S. production making its way back to the United States in no way undermines any of the key points in my paper.  Even if all imports were of U.S. offshored production, the fact remains that trade has been an important part of that success story.  To the extent that the import figures reflect offshored U.S. production, rising profitability affirms the wisdom of that decision.  But the proportion of imports attributable to offshored production is likely quite small, and not “substantial,” as Roberts suggests. 

Third, my failure to distinguish between offshored U.S. production and foreign production in the import data is insignificant because other data presented affirm the limited importance of offshored production.  Roberts asserts that offshoring simply substitutes imports for domestic production.  If that were the case and if offshoring constitutes more than an insignificant portion of U.S. imports, then we should see that in the data.  But we don’t.   

Instead, we see that U.S. factory output and U.S. value added increased the most for industries that also experienced the largest increases in imports.  In other words, if those imports are offshored U.S. production, they aren’t having a discernible substitution effect, as U.S. output, value added, and profits are rising too.  We also see that U.S. factories accounted for 21.1 percent of the world’s manufacturing output in 2005 (2.5 times greater than Chinese factories), which is virtually unchanged from the 1993 figure of 21.4 percent.  In absolute terms U.S. manufacturing output and value added have been rising virtually year-after-year, as has world manufacturing output.  Yet, the United States has somehow managed to preserve its share of world manufacturing output for at least 13 years.  If Roberts’ concerns about my data presentation had any merit, we would not observe the correlation between imports and output, nor would we see U.S. share of world output that has been remarkably stable. 

I usually don’t mind disagreement with my point of view.  It happens frequently.  But I find it offensive when someone disparages and dismisses my work without a coherent basis for doing so.

A Bad Copyright Reform Proposal

Matt Yglesias points to this Dean Baker piece arguing for sweeping reforms of the copyright system. I think he correctly identifies some of the problems with the copyright laws on the books today, but I think his conclusions reflect a poor understanding of the nature of the problem:

There are many other mechanisms for supporting creative work, such as university funding (most professors are expected to publish in addition to their teaching), foundation funding, or direct public support. It is easy to design alternative mechanisms to expand this pool of non-copyright funding, such as the Artistic Freedom Voucher, which would give each person a small tax credit to support creative work of their choosing.

The fundamental problem with copyright is that it gives copyright holders too much control over the works they create. Terms are too long, the rules regarding derivative works are too restrictive, penalties for infringement are too high, secondary liability is too broad, copyright formalities have been unwisely abandoned, and so forth. The first-order solution is to fix those problems: copyrights should last for 14 years. Authors shouldn’t be able to stop people from using their characters in fan fiction. Maximum penalties for infringement should be reduced by an order of magnitude. And so forth.

A sensible copyright system—perhaps similar to the one we had for most of the 20th century—would work just fine for the 21st century. It would ensure artists are fairly compensated while greatly reducing the deadweight losses Baker identifies in the status quo. The reasons these reforms haven’t happened (and indeed, the reason that copyright rules keep getting more and more draconian) is that the copyright industries are one of the most powerful special interest groups on Capitol Hill. This is the old story of concentrated benefits and dispersed costs. There’s no shortage of good reform proposals, there’s just no one with the clout to push any of those reform proposals through Congress.

Baker seems to be presenting his plan for taxpayer subsidies to artists as an alternative to the copyright system, but this fails to appreciate the way Capitol Hill works. The copyright interests who have been pushing ever-more-draconian copyright policies are not going to give up those benefits in exchange for taxpayer handouts. Similar schemes have been tried in other countries, and it didn’t lead to a more sensible copyright system. Instead, the industry just scooped up the subsidies and continued to lobbying for bad copyright policies as enthusiastically as ever.

Moreover, taxpayer handouts for artists has the long-run potential to hurt consumers a lot more than bad copyright policies ever could. Whatever the flaws of today’s overly-broad copyright rules, the extent of the damage is at least limited to the value of the items being sold. Bad copyright policy can allow copyright holders to capture an unfairly large share of the surplus value created by the purchase of creative works, but they can’t ever capture more than the total value of those works. In contrast, once we start putting artists on the dole, there’s every reason to think they’ll start lobbying for larger and larger welfare checks, the same way farmers do today. Whatever the flaws of the current copyright system, a system in which every rock star in the country is dependent on the dole would certainly be a lot worse.

David Harsanyi’s Nanny State

In the Washington Post today, Anita L. Allen of the University of Pennsylvania reviews Nanny State: How Food Fascists, Teetotaling Do-Gooders, Priggish Moralists, and Other Boneheaded Bureaucrats Are Turning America into a Nation of Children by David Harsanyi. She makes a point that I’ve thought a lot about in discussions of our growing “nanny state”:

But Americans were never as free as Harsanyi imagines….

It is true that in 1960 U.S. automobile drivers did not have to wear seat belts. But overreaching rules of other sorts reigned supreme. Under “blue laws,” most retail stores and virtually all liquor stores were closed on Sundays, presumably so everyone could stay sober and go to church. More profoundly, in 1960 married couples could not legally obtain birth control in Connecticut, mixed-race couples could not marry in Virginia, black kids in Georgia attended underfunded segregated public schools and homosexual sex was against the law.

No free-marketer, Allen leaves out a few other attributes of 1960, like 90 percent income tax rates and rigid regulation of transportation, communications, and finance.

Open the newspaper on any random page, and you can find evidence of the growing tendency to meddle in our lives: seat-belt laws, smoking bans, trans-fat bans, potty parity, and on and on. But are those things worse than the older laws that Allen cites? And if you go back further than she did, you can find worse indignities: established churches, slavery, married women denied property rights. So while we should deplore the deprivations of freedom that Harsanyi explores, we should not necessarily conclude that we’re progressively less free.

Allen also complains that

Readers have to wait until the final pages of this book to learn exactly why Harsanyi thinks the nanny state is a bad thing. The nanny state creates a moral hazard, he claims. “People act more recklessly when (purported) risk is removed.” Plus, “the rigidity of nanny regulations does not allow consumers to practice common sense and protect themselves.”

That’s a good consequentialist reason to oppose the nanny state, but it’s not the best reason. The real reason that we should be free to make our own decisions about seat belts, smoking, and fatty foods is that we’re adults; that we’re endowed by our Creator with the unalienable rights of life, liberty, and the pursuit of happiness; that to be free is to have moral autonomy and personal responsibility.

Still, any author should be thrilled to have the Washington Post recommend that we “read Harsanyi as a 21st-century John Stuart Mill.”

Real Tax Reform

A group of House Republicans has introduced a plan that could eventually break the logjam on moving tax reform legislation through Congress.

House members Paul Ryan, Jeb Hensarling, and John Campbell proposed a “Simplified Tax” system as an alternative to the current complex and inefficient individual income tax.

The Simplified Tax has two rates, 10 and 25 percent, a huge standard deduction of $25,000 for married filers (half that for singles), and a $3,500 personal exemption. It would eliminate all other deductions and credits that litter the current tax code. The dividend and capital gains tax rates would be made permanent at the current 15 percent.

I have proposed a similar two-rate tax plan. Remember also that the bipartisan Tax Reform Act of 1986 created a two-rate income tax structure of 15 and 28 percent. 

The GOP proposal is part of a broader package called the Taxpayer Choice Act, which includes elimination of the alternative minimum tax (AMT). While the Democrats and the Bush White House want to replace a $1 trillion of future AMT tax increases with other revenues, the House GOP plan would simply repeal the AMT. That makes sense because federal revenues have surged in recent years above historical levels. The White House should embrace the new plan as way out of their misguided AMT strategy.

Indeed, the White House could play a constructive role by bringing their corporate tax reform ideas to the table. The House plan does not include corporate tax reforms, but they should be added to the mix. In particular, the Simplified Tax could be paired with a 15 percent corporate tax rate (down from the current 35 percent), which would match the current 15 percent rate on dividends. That would make the combined corporate plus individual rate on dividends similar to the top rate on wage and interest income, and reduce the tax code bias against corporate equity.

The result of these reforms would be a much more efficient tax code that treated different households and different types of income more equally. The lower rates on individuals and corporations would sharply cut tax avoidance and evasion, which has been a concern on Capitol Hill this year.  Investment would pour into the United States, raising wages for every American worker.

As a way to grease the legislative wheels, the GOP tax plan would offer individuals the choice of staying with the old tax system or jumping to the new one. No taxpayer would be a loser under this plan. The only losers would be the army of tax accountants and lawyers needed to keep the current system running.

Voting on Historical Truth

As the House Foreign Affairs Committee passes a resolution to call the mass killings of Armenians that began in 1915 “genocide,” defying all eight living former secretaries of state, who signed a joint letter saying that such a resolution by Congress would seriously harm U.S. relations with Turkey, I recommend the thoughts of a young Armenian-American writer, Garin Hovannisian:

As the great grandson of genocide survivors, the grandson of genocide historians, and the son of Armenian repatriates — though writing, I’m afraid, without the sanction of the generations — I am insulted by that sticker. That Congress “finds” the genocide to be a fact makes the tragedy no more real than its refusal, so far, has made it unreal. Truth does not need a permission slip from the state.

As an heir, moreover, of an American tradition of limited government, I am annoyed that the legislature is poking into a sphere in which it has neither business nor experience: the province of truth. It is bad enough that a committee of aristocrats governs the conventions of politics, economics and human rights. We the citizens scarcely need to sign over the laws of nature, too, lest gravity be repealed and the whole race goes floating about the universe.