Are the Uninsured Free-Riding?

Should government require people to purchase health insurance?  My answer is no.  Here are three reasons.

  1. The uninsured bear the health costs of their decision not to insure.  If my neighbor doesn’t buy health insurance, that doesn’t threaten my health.  (He might threaten my family’s health if he doesn’t get his family vaccinated.  But vaccinations can easily be obtained without insurance.)
  2. As a group, the uninsured bear the financial costs of their own health care.  Many uninsured people show up at the hospital, get treated, and then don’t pay their bills.  Doctors and hospitals scream an awful lot about having to deliver “uncompensated” care.  But two recent studies – one on doctors services by Jonathan Gruber and David Rodriguez, the other on hospital services in California by Glenn Melnick and Katya Fonkych – show that the uninsured who do pay their bills more than make up for the uninsured who don’t.  Why?  The uninsured pay the highest prices.  Gruber and Rodriguez write, “Our best estimate is that physicians provide negative uncompensated care to the uninsured, earning more on uninsured patients than on insured patients with comparable treatments.”  Melnick and Fonkych write that in 2005, “uninsured patients as a group still paid a higher percentage of charges, on average, than Medicare and Medicaid.”  Note that this is an average: some providers may provide lots of uncompensated care, but that appears to be offset by those that provide negative uncompensated care.  As a group, the uninsured appear to pay for themselves.
  3. The uninsured pay higher taxes.  Federal and state governments offer large tax breaks for employer-sponsored health insurance.  The uninsured, by definition, do not obtain employer-sponsored health insurance.  Because they forgo those tax breaks, they pay higher taxes.  Those additional tax payments help fund things like subsidies to hospitals that provide (positive) uncompensated care (see #2).

So it’s not at all clear that when people don’t buy health insurance, they are imposing costs on the rest of us.  The uninsured mostly just hurt themselves.

What “Open Discussion?”

Over at New Talk, a public policy discussion project that purports to bring in “experts…who have different points of view…and a commitment to the kind of open discussion that might take place around a dinner table,” anything but an open discussion is going on about the No Child Left Behind Act. Yes, the e-talkers range from neoconservative Chester E. “Checker” Finn to American Federation of Teachers President Randi Weingarten, but in one way or another all of the discussants believe in significant federal involvement in education. That’s left out one very important perspective: the Constitution’s.

Here’s moderator John Merrow’s reason for keeping away those who think that the federal government has neither the Constitutional authority, nor the ability, to run American education:

Any talk of abandoning No Child Left Behind is foolish because NCLB is the continuation of a long trail of federal education legislation that traces back to the Elementary and Secondary Education Act of 1965.

Congress and the next Administration must do something, but what? That’s the question posed to a remarkable roster of deep thinkers and activists.

Merrow’s question framing has, predictably, produced not the “open discussion” promised by New Talk, but a very narrow exchange dominated by “national standards” chat. Indeed, former Columbia Teachers College president Arthur Levine remarked in his first contribution to the forum that he “was surprised at the commonality of views the group shares.” He shouldn’t have been: For the most part, the group is a collection of education policy insiders with a big bias toward government “doing something,” and the moderator made certain that asking whether the feds actually can do something — at least of value — was off limits.

Of course, it isn’t rational to just assume that NCLB — or any federal interference in education—will remain forever just because it is the continuation of legislation dating back to 1965. Consider that as recently as 1996 the Republican Party had eliminating the U.S. Department of Education in its platform. Or that two major pieces of legislation that would essentially dismantle NCLB — the LEARN and A-PLUS acts — are working their ways through Congress. Or that several states have seen considerable efforts to leave NCLB behind, despite the sizable financial blow doing so could entail. Or that in polling Americans often express great distaste for NCLB.

So what about the question of whether the federal government is actually capable of producing good education? The evidence, whether we bury our heads in the sand or not, is that it can’t. Since 1965, real federal funding for elementary and secondary education has grown nearly six times larger, while achievement has been essentially flat or declining. Under NCLB, what scores were increasing have seen improvements slow while others have seen losses. And why is this? Politics. Washington, like all government, is more responsive to special interests that make their living off of government programs than the people those programs are supposed to help. So the feds keep lavishing cash on the public schools, while the states keep setting almost subterranean “proficiency” bars, using statistical gimmicks to exclude the groups the law is supposed to make visible, and the administration cheers NCLB’s “success.”

The one highlight of the New Talk discussion so far (it runs through tomorrow) has been education historian Diane Ravitch, whose past calls for national standards I’ve taken to task. She’s still calling for national standards, but she has nonetheless been the most realistic of the discussants. After asserting that “there is little to commend NCLB,” she made clear that any national standards would have to be disconnected from federal sanctions because “states and localities” — not Washington — “are closer to the schools and likelier to come up with workable reforms.” She also deflated the soaring rhetoric of those who talk about NCLB as an historic shift because it has finally shone light on the kids left behind (though she also leads one to conclude that she might actually want stronger national tests than she outlined earlier):

OK, so NCLB is historic. No doubt about it. Never before has the federal government reached so deeply into each and every public school in the nation. There was a fundamental error, however, in allowing states to define their own standards and write their own tests. As a result of this error, the public does not have the information that Checker speaks about; instead, in most states, the public gets a wildly inflated picture of student performance.

Unfortunately, as Ravitch being the highlight portends, another perspective is almost wholly absent from the discussion: that accountability exercised by parents through universal school choice, not continued top-down accountability from states or Washington, is the key to truly effective education reform. Consumer choice is the primary driver of accountability for almost everything in America that we take for granted — consumer electronics, package delivery, automobiles, greeting cards, sneakers, home construction, and on and on — but not so for schooling. Maybe that’s why over the decades education hasn’t progressed at all, while almost every other good or service has gotten much better. Maybe that’s also why school choice should be a part of any “open discussion” about how best to deliver education.

New Talk could have put together a truly valuable forum on federal education policy if it had included all perspectives. Sadly, it chose not to.

Feldstein the Flip Flopper

Harvard’s Martin Feldstein was strongly for the “stimulus” rebates earlier this year, but now he is against them.

In his Wall Street Journal article today, he looks at the data and finds that consumer spending increased little compared to the amount of the rebate checks, thus it appears that households used most of the rebate money to pay down debt. In his article, Feldstein seems to be saying that he still believes in Keynesianism, but that this particular Keynesiam stimulus didn’t work very well. 

Yet Feldstein also says that recent data “corresponds to what both basic economic theory and common experience imply,” that this tax rebate effort didn’t work because it was temporary, not permanent.

I used basic economic theory to oppose the stimulus package from the start, calling it Kindergarden Keynesianism.

Good for Feldstein to now admit that he was wrong. But I found the rush by so many top economists six months ago to ”solve” the problem of slowing growth with central planning techniques very disturbing. Future taxpayers are $150 billion further into debt because of their mistake.

The IMF Fights Back

Responding to my post from last week, James Gordon, the Assistant Director of the Asia and Pacific Department at the International Monetary Fund, wrote to complain that I was being unfair in my criticism of the international bureaucracy. The full letter is reprinted below, and he makes two points. First, he argues that I was unfair to criticize the IMF for being quick to recommend higher taxes and currency devaluations. He certainly is correct that the IMF does occasionally propose good policies, but I am quite comfortable with my claim that bad policies generally are “high on the list” of recommendations. For those who want more information, the Policy Handbook chapter by Ian Vasquez of Cato, the Meltzer Report, and various studies by the Joint Economic Committee (here, here, here, and here) make the case that the IMF is too statist in its orientation.

Second, he argues that Japan has been frugal. Looking at the same OECD data (specifically, Annex Table 25), he uses 2005 as the base year to make his point, while I was using 2006 since I wanted to capture the most recent developments. But we both can be accused of cherry-picking the data, which is why I made the point in my original post that the long-run trend clearly shows an expansion in the burden of government spending. The more relevant point, however, is that Japan has a public sector - consuming more than 36 percent of GDP - that is far too large. According to IMF data, government spending consumes only about 16 percent of economic output in Hong Kong. If the bureaucrats really want to give Japan some much-needed advice, they should recommend sweeping and radical expenditure reductions rather than trimming-around-the-edges proposals that merely reduce the size of previously-scheduled spending increases. Mr. Gordon explains that there are “limits” to this approach given the “social objectives” of Japanese politicians. But why should the IMF let Japanese political constraints be a factor? Most important, recommending higher taxes turns the IMF into an enabler for Japan’s irresponsible politicians.

Here’s the full letter from the IMF:

Dear Dr. Mitchell:

I was glad to see in your recent blog (“Typical Bad Advice from the IMF”) that you sometimes wonder whether you are being unfair in characterizing the IMF as peddling snake oil economic advice such as higher taxes and currency devaluation. I encourage you to do more research into whether your prior is justified. On currency devaluation, you will be aware that over the last few years the IMF has been pushing China to do the opposite, namely to allow the exchange rate to appreciate more rapidly because it is undervalued. Certainly, in the past, we have recommended that countries devalue, but this has tended to be in cases where exchange rates were overvalued. On taxes, the IMF does not only recommend increases. Again it depends on the circumstances. For example, we have been supporting tax cuts in Australia and New Zealand of late because strong economic growth was leading to large fiscal surpluses.

In Japan, public debt is already very high and the population is aging rapidly. If left unchecked, social security spending (primarily pensions and medical spending) threatens to balloon over the next twenty years. Contrary to your assertion, the authorities have been making efforts to reform entitlement programs to limit this spending (the 2004 Pension Reform being a case in point). The authorities have also been cutting expenditure elsewhere (notably in public works). In fact, using the OECD figures you cite, general government spending declined (not increased as you say) to 35.8 percent of GDP in 2007 from 38.4 percent of GDP in 2005. There are, however, limits to expenditure cuts, particularly given the Japanese government’s social objectives, hence our view that a consumption tax increase is also likely to be necessary.

Yours sincerely,

James Gordon
Assistant Director
Asia & Pacific Department
International Monetary Fund

WSJ Misses Turkey’s Tax Cuts

A lengthy front-page piece in the Wall Street Journal today (“Muslim Land Joins Ranks of Tigers”) chronicles Turkey’s explosive economic growth since 2001. The nation’s per-capita GDP appears to have more than doubled in the past five years.

The article mentions the free-market orientation of the ruling party, and it rightly points to much better inflation performance in recent years as a factor in reviving business confidence.

But the article completely missed Turkey’s dramatic corporate tax cuts of recent years. According to KPMG, Turkey’s corporate tax rate was reduced in steps from 44 percent in 1998 to just 20 percent today. The Journal notes that “foreign investment has jumped” in recent years, but it apparently didn’t occur to the reporters that taxation might be a factor.

Read about exciting tax cuts in many other nations, including nearby Muslim nation Egypt, in our upcoming Global Tax Revolution.