Does Mandating Diabetes Coverage Lead to Moral Hazard?

Economists Jonathan Klick and Thomas Stratmann find that it does.  In the latest issue of the Journal of Law and Economics, they write:

In the face of rising rates of diabetes, many states have passed laws requiring health insurance plans to cover medical treatments for the disease. Although supporters of the mandates expect them to improve the health of diabetics, the mandates have the potential to generate a moral hazard to the extent that medical treatments might displace individual behavioral improvements. Another possibility is that the mandates do little to improve insurance coverage for most individuals, as previous research on benefit mandates has suggested that mandates often duplicate what plans already cover. To examine the effects of these mandates, we employ a triple-differences methodology comparing the change in the gap in body mass index (BMI) between diabetics and nondiabetics in mandate and nonmandate states. We find that mandates do generate a moral hazard problem, with diabetics exhibiting higher BMIs after the adoption of these mandates.

GAO Plan for Pakistan: Better Planning

Thursday the Government Accountability Office published a report that points out that the United States lacks a “comprehensive plan” that integrates “all elements of national power” to deal with problem of terrorism emanating from Pakistan’s Federally Administered Tribal Areas. The report exemplifies the cult of planning that enthralls U.S. foreign policy analysts — and not just because it uses the phrase “comprehensive plan” 47 times in 25 pages.

Democratic leaders can use the report to bash President Bush, which is presumably why they requested it. But most people will merely find it useless. It is, after all, the GAO’s shtick to issue bland reports like this one, which does little other than note a lack of coordinated planning and then recommend more coordinated planning. (The report does say, to be fair, that the United States has done too little to address the cause of terrorism in northwest Pakistan, which it identifies, with bizarre confidence, as a lack of economic development.) And no one, even at Cato, can really be against better planning and coordination of government agencies to combat terrorists. Seems harmless. So what’s the problem?

The report never considers the possibility that the great minds of Washington, D.C., however well coordinated, may not contain the solution to the problems in Pakistan’s northwest hinterlands. Planning, after all, isn’t power.

I have never been, I confess, to an inter-agency planning meeting, so I can’t rule out the possibility that they’re magic. Maybe the agency representatives perform coordinated rites that reveal the wisdom to solve any problem and the power to implement their insight.

Barring that, it might have been worth devoting a sentence or two in the report to the difficulty of planning the affairs of other people’s countries. The area in question, after all, is not only beyond the control of our government but beyond the control of Pakistan’s, which we also do not control. This is not an engineering problem, like a faulty bridge. This is a problem of Pakistani politics and geography. There is not a U.S. plan that can fix that, including an invasion plan.

Growing up in Boston, I annually developed plans to fix the Red Sox’s lineup. So did my brother. My father had his own ideas. The Red Sox management never implemented any of our plans. I’m confident that the GAO would have told us that our failure stemmed from a lack of coordinated planning and suggested that we draw up a comprehensive strategy to harness all elements of Friedman power.

I am not arguing that the United States should abandon efforts to deal with terrorism in Pakistan. I am arguing that we should recognize the limits of what our policy can do. A belief that we can solve problems that we can’t may lead to costly efforts to eradicate problems rather than practical steps to manage them.

One reason Harvey Sapolsky, Chris Preble, and I wrote a paper about the lessons of the war in Iraq was irritation at the tendency of defense analysts to cast the occupation there as a failure of planning and to generate policy recommendations from that claim. Observing that planning for the occupation was poor and that the occupation went badly, the analyst would assume that the former caused the latter, and instruct the U.S. government to reform the interagency process to better plan future occupations. We argue that the United States never had much power to control Iraq’s politics, despite 100,000 to 150,000 troops in-country and the billions we spend every week. Problems of planning and coordination distract from the more important policy changes the war suggests. But the fixation on planning in Iraq at least made some sense, being that we occupied it.

The GAO report is the sort of thing Aaron Wildavsky had in mind he wrote that, “if planning is everything, maybe it’s nothing.” Phase one in my plan to save U.S. foreign policy from the cult of planning is getting policymakers to read that essay. In phase two, they apply it to foreign policy. Phase three involves converting the resulting despair into realism. In phase four (Victory), we cease our efforts to control everything that concerns us abroad. I am confident that this plan will fail.

The Remarkable Resilience of Nature

How often have you heard that coral reefs are fragile and would be wiped out by global warming?

If you google “fragile coral reefs” (without the quotes) you’ll get 493,000 hits. So imagine my surprise on stumbling on a news report titled, “Marine life flourishes at Bikini Atoll test site.” The report tells us:

It was blasted by the largest nuclear weapon ever detonated by the United States but half a century on, Bikini Atoll supports a stunning array of tropical coral, scientists have found.

In 1954 the South Pacific atoll was rocked by a 15 megaton hydrogen bomb 1,000 times more powerful than the explosives dropped on Hiroshima.

The explosion shook islands more than 100 miles away, generated a wave of heat measuring 99,000ºF and spread mist-like radioactive fallout as far as Japan and Australia.

But, much to the surprise of a team of research divers who explored the area, the mile-wide crater left by the detonation has made a remarkable recovery and is now home to a thriving underwater ecosystem.

99,000 degrees Fahrenheit! By comparison the upper-bound estimate for global warming is a puny global temperature increase of 11.5 degrees Fahrenheit (less in the ocean). So even if global warming wipes out life on earth, global warming catastrophists can take comfort that nature will, as it inevitably must, reassert itself. Some, convinced that humanity is the problem, may even welcome such an outcome — no humans, but plenty of nature (over time). [Fifty-four years later at Bikini Atoll, recovery is not complete. Perhaps 28 percent of coral species may still be absent.]

Post Script: On the topic of corals and global warming, here’s an article on temperature tolerant corals off the coast of Eritrea, where waters can reach 98.6 degrees F, which incidentally is the average core body temperature of a human being.

Post Post Script: Also check this story from Science Daily: “Coral Reefs Living In Sites With Variable Temperatures Better Able To Survive Warm Water.”

The Housing Crisis: Maybe We Should Do Nothing?

Two weeks ago, the Senate passed legislation ostensibly intended to address home foreclosures. That legislation is now being criticized as little more than a handout to corporate interests. The criticism is legit; the bill is largely a package of tax breaks for developers (and other struggling industries, including those that have nothing to do with housing), along with tax credits for the purchasers of foreclosed homes (a provision that has its own criticisms) and grant money to local governments that want to play Flip This House.

Across Capitol Hill, the House is considering different foreclosure legislation that would give tax credits to first-time homebuyers and developers of lower-cost housing (proposals that are subject to some of the same criticisms now being lobbed at the Senate bill). House and Senate committees are also considering additional legislation that would permit the Federal Housing Authority to underwrite as much as $300 billion in mortgages for borrowers who are at risk of falling behind on their payments.

Lawmakers’ interest in combating the mortgage problem is understandable: default and foreclosure are painful for homeowners, clusters of vacant houses are hard on communities, and the struggling homebuilding industry is a significant contributor to the nation’s overall economic malaise. (Another factor that makes it understandable: this is an election year.)

However, before Congress puts taxpayers (most of whom are also paying mortgages or renting their homes) on the hook for billions of dollars in grants, tens of billions in tax breaks, and guarantees for hundreds of billions of dollars in mortgages, three points should be acknowledged:

  1. The bailout proposals are as much a benefit to lenders as borrowers.
  2. The homebuyers who are to be rescued are not the victims of “raw deals” (unless they were deceived or defrauded).
  3. The bailout could make the nation’s overall economic condition worse.

The housing market turmoil is the product of two related factors:

  • a decline in house prices in several geographic areas that were super-heated in recent years, and
  • the discovery that many mortgage borrowers are higher-risk than lenders had previously realized.

As long as house prices were rising, the risky borrowers were not a problem. Borrowers who fell behind in their payments could sell their houses (and usually reap capital gains). But when the market reversed, this “escape hatch” closed and defaults and foreclosures ensued.

The home loans at the heart of the mortgage meltdown are “subprime” loans — loans made to borrowers with less-than-stellar credit and/or little money down. Though subprimes constitute only 12.7 percent of all outstanding mortgages, they comprise 55.2 percent of mortgages that are in foreclosure. (Mortgage figures are calculated using data from the most recent National Delinquency Survey.)

The fact that subprime loan defaults are (literally) breaking the investment banks indicates that lenders were charging subprime borrowers too little — that subprime borrowers’ mortgage payments weren’t sufficient to cover their risk of default. That’s why investment banks are suffering severe write-downs (and in the case of Bear Stearns, near collapse) and brokerage firms have needed capital infusions. Those firms would benefit greatly from many of the proposed government interventions, even if they have to take a “haircut” on their loans. Hence, claims that bailout legislation is intended to “help Main Street, not Wall Street” should be taken with grains of salt.

Further, consider that 73.3 percent of the subprime loans in foreclosure are adjustable rate mortgages (ARMs). ARM borrowers not only paid lower rates than what their default risk merited, but they also paid even-lower introductory rates for the first few years of their mortgages. In essence, the borrowers entered into “lease-to-buy” contracts, with the “buy” provision kicking in when the ARMs reset to higher rates. The increased foreclosures can be understood as borrowers deciding not to exercise the “buy” portion of the contract, either because the terms are relatively unaffordable or because the house is no longer worth the contracted amount.

Commentators err when they describe these borrowers as being irresponsible or foolish for signing such contracts. The borrowers simply made a risky but reasonable decision to try to buy a house, on very generous terms given their default risk, in a market that was experiencing tremendous appreciation. They are now making a reasonable decision to bail on their contracts and go back to renting in the wake of the housing market downturn. Of course, the borrowers feel pain when they lose their homes. But, unless they were deceived or defrauded, they were not the victims of raw deals.

Moreover, for the overwhelming majority of subprime loans, the borrowers’ original decision to buy has worked out nicely — more than 80 percent of subprime loans (and just under 80 percent of subprime ARMs) are currently in good standing. Moreover, many of the people who have used subprime loans, ARMs, and other oft-denigrated “exotic vehicles” over the past decade have realized significant capital gains, even with the recent decline in house prices. If some so-called “consumer advocates” get their wish and regulation is implemented to curtail or prohibit the use of subprime loans and ARMs, higher-risk would-be homebuyers as a group will be harmed.

Another worry is that the bailout and other interventions could make overall economic matters worse. The United States’ current economic malaise is partly the product of the housing market collapse and the associated mortgage woes, but it is also partly the product of higher energy prices. Put simply, current conditions indicate that market actors need to shift their investment and risk-taking away from housing and toward energy development and conservation.

However, government and Federal Reserve efforts to combat the housing crunch and the financial crisis could dampen the incentives to make that necessary investment switch. Ready money makes it easier to delay painful but necessary changes.

Economic corrections are always painful, but as GMU economist Alex Tabarrok and WaPo columnist Robert Samuelson each recently wrote, the pain is increased if the correction process is drawn out. Tabarrok’s NYT column compares the recent U.S. housing experience with Japan’s dramatic boom-and-bust cycle of 1985–2000. We should be mindful of Japan’s broader experience over the 1990s: the government struggled mightily to blunt the pain of a correction, resulting in an agonizing decade of economic stagnation.

All of this raises the question: Should government intervene at all in the foreclosure mess? In asking this, I’m not arguing that struggling borrowers should drop dead. But there is much more downside risk and much less justification for intervention than what proponents have acknowledged.

Olympic Folly

When we think of the Olympics, we increasingly think of corruption scandals, doping, tacky commercialism and, perhaps even worse, all those sappy human interest stories NBC runs on its telecasts.  And now we have the Chinese tarnishing this summer’s Games by cracking down in Tibet, leading protesters to disrupt the torch relay in London, Paris, San Francisco, and elsewhere.  If only we could go back to those days when the Olympics brought together the world’s youth to hold hands and sing kumbaya while a few people ran around a track and swam in a pool, right?

Actually, these modern Games (or post-modern, if you consider, as I do, the end of the Cold War as a watershed in geopolitics) are much closer to the ancient Greek model than the festival of shamateurism that a bunch of European aristocrats invented at the end of the 19th century.  Since the end of the cold war, the Olympics have thrown off the chains of ideological battle and reverted to the values of the original games, among which were the dominance of the personal over the national, the economic over the political and the athletic over the larger concerns of the state.  Thus these new-old Olympics have returned to their entertainment, ritual, and athletic essence, for which we can be grateful.

Which is why – I argue in the National Interest Online – however a particular country wants to express its displeasure with China’s oppressive regime, boycotting the Olympics is not the way to go.


Paraguay between Three Bad Choices

The worse, the worser and the worst. Those are the choices confronting Paraguayans this Sunday when they head to the polls to elect a new president.

The leading candidate is Fernando Lugo, a former Catholic bishop who entered politics last year and endorses Hugo Chávez’s “socialism of the 21st century.” Running behind him in the polls is Lino Oviedo, an authoritarian retired general who spent 10 years in prison after leading a failed military coup in 1996. In third place is Blanca Olevar, of the ruling Colorado party, which has governed Paraguay without interruption for 61 years—longer than any other party in the world. The Colorado party is one of the most corrupt political organizations in Latin America (and that’s saying something). Fifteen out of its 20 leading Senatorial candidates—including the current president Nicanor Duarte—have been investigated for corruption.

Paraguay is one of the poorest countries in Latin America. Its GDP per capita (PPP adjusted) in 2006 was only $4,040. During 1995-2005, Paraguay was the world’s 10th slowest growing economy at 1.2 percent a year. Lack of an independent judiciary, crippling regulations on labor and businesses, and widespread corruption are the primary reasons why Paraguay is stuck in poverty.

Unfortunately things might get worse. This has been the bitterest political campaign since the country went back to democracy in 1989. President Duarte denounces that Venezuelan and Ecuadorean elements are within Paraguay ready to start violence once the Colorado party claims victory on Sunday. Candidate Lugo warns that the only way for him to loose is through fraud, and calls his sympathizers to be ready to go into the streets. In Paraguay there’s no runoff election, so Sunday’s winner will automatically become the next president.

This election has been mostly neglected by the international media. That could change on Sunday night.

Obama’s Truly Radical Capital Gains Tax Agenda

Every so often, a politician commits the horrible mistake of saying what he really thinks. This happened at the Democratic debate. Barack Obama has a very punitive proposal to nearly double the capital gains rate. When asked by one of the moderators whether this makes sense, especially given the historical evidence of big “Laffer-Curve” effects, Senator Obama dismissed concerns about falling revenue, arguing that a high rate was justified by “fairness.” In other words, Senator Obama is so fixated on punishing success that he is even willing to reduce the amount of tax revenue flowing to Washington that he and his buddies can redistribute. This position is so radical that my Cato colleague Sallie James was distracted from her work on the free trade agreement with Colombia (I’m not a foreign policy person, but that’s apparently a country bordering Nepal and Mauritania) and demanded that I say something about the issue. But let’s first look at what Senator Obama actually said

MR. GIBSON: And in each instance, when the rate dropped, revenues from the tax increased. The government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down. So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?

SENATOR OBAMA: Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness.

The Senator then proceeded to bash evil rich (sorry for the redundancy) people, so the moderator asked the question again:

MR. GIBSON: But history shows that when you drop the capital gains tax, the revenues go up.

SENATOR OBAMA: Well, that might happen or it might not. It depends on what’s happening on Wall Street and how business is going.

This exchange is particularly revealing since Senator Obama actually admitted that a tax rate increase might lose revenue, but he held firm to his position that the capital gains rate should be increased from 15 percent to 28 percent. This reminds me of a conversation I had years ago with an economics professor from an Ivy League university. He told me that he once asked his left-wing colleagues whether they would support lower tax rates if they knew that tax revenues would rise. Most of them, he said, shared Obama’s viewpoint that punishing success was more important to the statist ideology than increasing revenue for government.