The big international story that broke on Sunday understandably was the death of Osama Bin Laden. But another big story was that May 1 also marked the thirtieth anniversary of the introduction of Chile’s successful private pension system. Implemented by José Piñera (now a Distinguished Senior Fellow at Cato) to replace unsustainable public pensions, private retirement accounts have averaged real annual rates of return of more than 9 percent, contributed to economic growth and the rise in savings, and helped turn working Chileans into capitalists. They’ve been a key to Chile’s economic progress and political maturity. The reform has been copied in part or in full by some 30 countries around the world. And contrary to what American critics on the left claimed at the time, private pensions weathered the global financial storm admirably. It’s only a matter of time before the United States and other rich nations begin addressing the crisis in public pensions in the same way. But the sooner the better. See this piece from Investor’s Business Daily on Chile’s system at 30.

Over at The Incidental Economist, Austin Frakt challenges a couple of claims I made on NPR about Medicare reform. (Here’s how NPR reported my comments in print.)

My claims are pretty simple.

1. If Medicare subsidizes enrollees by giving them a fixed amount of money, much like Social Security does, they would be more cost-conscious than they are under the current open-ended subsidy, because enrollees who avoid wasteful spending would themselves get to keep the savings. Put more plainly, people spend their own money more carefully than they spend other people’s money.
2. Health insurers and health care providers would compete to serve these cost-conscious Medicare enrollees on the basis of both cost and quality. Prices would fall while quality improves.

I’m not really sure to what extent all this would occur under the Medicare reforms the House passed a couple of weeks ago, because we don’t yet know to what extent each enrollee’s subsidy would resemble a fixed amount of money.

Here’s what Frakt does with my claims:

[A]s I heard these words I wondered if we had any evidence on hand about the relationship between lower premium subsidies and health care cost inflation. Indeed we do! Premiums in the commercial market are subsidized by the government at a lower rate than those in Medicare. [Emphasis added.]

He then throws up the chart, shown below the jump, showing that for common benefits, the rate of growth in per-enrollee spending is “pretty similar” in Medicare and private insurance. He concludes: “With data like this, I think we need to reexamine some of our theories about what lower premium subsidies can do.”

Oy, where to begin?

First, Frakt does not actually challenge my claim. My claim is that voucher-like Medicare reforms will lead to reductions in the per-unit cost of producing certain goods and services, and therefore to lower prices. Frakt responds with data on health care spending. When someone predicts that P will fall, introducing into evidence what has historically happened to P x Q is no kind of rebuttal. The confusion Frakt sows is rooted in the fact that both prices and spending can be accurately described as costs. Such confusion could be avoided were everyone to honor Cannon’s First Rule of Economic Literacy: Never say costs when you mean spending.

Second, though the tax preference for employer-sponsored health insurance distorts relative prices the same way an open-ended subsidy does, it is not a subsidy. This isn’t really relevant to the matter at hand, but it’s worth emphasizing to avoid such silliness as this.

Third, it would be great if there existed one chart that would settle once and for all whether Medicare or a free market does a better job of containing costs. Alas, this is not that chart. Frakt uses it to make a less-ambitious point about the effects of larger versus smaller policy-induced price distortions, but its shortcomings nevertheless confound that comparison, too. In addition to measuring increases in spending (whose effect on social welfare is ambiguous) rather than increases in cost (which are always bad), this chart handicaps private insurance by leaving off three or four years of explosive growth in per-enrollee Medicare spending (1966–1969). Worse, it reeks of endogeneity problems. Amy Finkelstein finds evidence that Medicare itself increases spending among those with private insurance (mostly by increasing hospital capacity), and that this effect has grown over time. Moreover, as Medicare spending rises, so do average marginal tax rates, which increases the price distortion created by the tax exclusion, which increases spending on private insurance. For all the play it gets on the Left, this chart serves no useful purpose that I can discern. Economists should be embarrassed to use it. If it were a farm animal, and social scientists farmers, they would have to take it behind the barn and put a bullet in its head.

Fourth, we are not yet at the point where we need to reexamine the theory that demand curves slope downward. There is ample evidence to show that Medicare enrollees will respond to voucher-like reforms by choosing more economical health plans, and that health plans and providers will respond with greater efficiency. Thomas Buchmueller reports:

Two notable experiments…took place in the mid-1990s: the University of California (UC) and Harvard University both offered a menu of plans that varied in generosity, but adopted a “fixed dollar contribution” policy. The plans also varied significantly in cost, so employees had a greater incentive to consider price when selecting a health plan…

In both cases, employees were quite sensitive to price, and were willing to switch plans to save as little as $5 per month in out-of-pocket premiums…In addition to this demand response, participating insurers lowered their premiums in order to compete for enrollment.

Fifth, there is plenty of evidence that prices can and do fall in health care — from research on the markets for laser-eye and cosmetic surgery, to the work of Clay Christensen and his colleagues, to the research of David Cutler and Mark McClellan. (If spending increases while prices are falling, it is because changes in Q dominate changes in P — which could be due to all these open-ended government subsidies and other price distortions.)

Finally, as a response to the general theme of that NPR story: we’re a long, long way from the point where we have to worry that reductions in the growth of Medicare spending are going harm enrollees’ health. Relying on data from the Dartmouth Atlas, President Obama’s Council of Economic Advisers reminds us that “nearly 30 percent of Medicare’s costs [spending!] could be saved without adverse health consequences.” And there is plenty of evidence, from the RAND Health Insurance Experiment and elsewhere, that plans with greater cost-sharing or care management reduce utilization without harming patients’ health.

I cannot fathom what has opponents of Medicare vouchers so spooked. It cannot be the effects that vouchers would have on Medicare enrollees and taxpayers.

Yesterday, the U.S. Department of Education sent proposed — and highly controversial — “gainful employment” regulations to the Office of Management and Budget for review, the first step in the process of officially publishing them. The regulations — assuming they haven’t changed drastically from previous proposed versions — would limit the ability of students in vocational postsecondary programs to access federal financial aid if those programs produce debt burdens the regs deem too high, or salaries they deem too low. The exact details on what constitutes “too high” and “too low” should be revealed soon.

The big problem with this is that it is aimed at easily abused for-profit schools while leaving the rest of waste-drenched higher education untouched. But another problem, the very real risk of bureaucratic bungling, also looms large. Indeed, a story out just today from California notes that the state greatly overestimated how much it would save by cutting Cal Grant eligibility for students at schools that showed up on a recent U.S. Department of Education list of institutions with high three-year loan default rates. The problem: The Education Department had accidentally calculated three-year-and-three-month rates, significantly overstating defaults. In fairness to the Department, it did say the list was unofficial, so California officials also bear a lot of the blame; but it sure doesn’t bode well that the Department would publish something so flawed.

There is a much more effective, and less dangerous, way to hold schools accountable than to have the federal government set blanket, hyper-politicized rules and try to enforce them. It is to have customers consume higher education using their own money rather than having Washington send tens-of-billions of inflation-fueling, extravagance-enabling dollars to students and schools every year. The problem is, that would just make it too hard to buy votes by falsely promising great education for all.

In my quest to downsize the government, I’ve been looking at the Department of Labor budget recently. My vision is to cut federal spending to create a freer and more prosperous society. James Madison’s vision was for a federal government of “few and defined” powers.

I’ve discovered that the Secretary of Labor, Hilda Solis, has a different vision. In her budgets, on her speaking podiums, and in her strategic plans, she says that her “vision” for federal action is “Good Jobs for Everyone!”

She doesn’t just want open labor markets so that people can pursue their own careers. No, she wants the 17,000 administrators in her department to find a good job for every single American. “Good Jobs for Everyone … will guide everything we do here at the department,” she says.

That’s lovely, but where does she get the legal authority for it? Article 1, Section 8 in the Constitution allows the federal government to coin money, establish a patent system, and maintain a navy, but it doesn’t say anything about “good jobs for everyone.”

I suppose worrying about constitutional authority is passé. Political leaders today want to think big. So in the spirit of Secretary Solis, here are some ideas for other cabinet secretaries needing a new and exciting vision:

• Secretary of Agriculture: Soaring crop prices for all farmers!
• Secretary of Commerce: Huge profits for every business!
• Secretary of Defense: More wars and fat contracts for all weapons makers!
• Secretary of Education: Straight As for all students!
• Secretary of Energy: Windmills for every family!
• Secretary of Health and Human Services: Huge portions but slim waists for all!
• Secretary of Housing: Granite countertops and Jacuzzis for every home!
• Secretary of Justice: Lawsuits for all accidents!
• Secretary of Transportation: High-speed subway trains for every village!
• Secretary of the Treasury: More IRS agents because someone has to pay for all this!

A few readers have now asked me about the “libertarian” reaction to yesterday’s Supreme Court ruling that allows companies to use boilerplate contract provisions that require consumers to arbitrate any disputes individually rather than coming together as a class action for arbitration purposes (let alone being able to bring claims into court). That is, where an individual claim isn’t worth that much money (about $30 in yesterday’s case of AT&T Mobility v. Concepcion), no lawyer will take the case and so only by having a class file collectively, the argument goes, will justice be served.

The ruling broke down 5–4 on “conventional” lines, with an opinion by Justice Scalia, joined by the Chief Justice and Justices Kennedy, Thomas, and Alito, holding that the Federal Arbitration Act trumped (“preempted” by operation of the Constitution’s Supremacy Clause) California law that was more favorable to the plaintiffs. Justice Thomas also filed a concurrence, noting that “state public policy against arbitration” is not enough to revoke a contract with an arbitration agreement. Justice Breyer dissented, joined by Justices Ginsberg, Sotomayor, and Kagan, arguing that certain class action waivers are unenforceable.

Here’s some more background (edited from a useful summary I received in a Heritage Foundation email): A cellular telephone contract between the parties provided for arbitration of all disputes, but did not permit classwide arbitration. After the Concepcions were charged sales tax on the retail value of phones provided for free under their service contact, they sued AT&T, and their suit was consolidated with a class action alleging false advertising and fraud. The district court denied AT&T’s motion to compel arbitration. The Ninth Circuit affirmed, reasoning that the Federal Arbitration Act, which makes arbitration agreements valid and enforceable except on such grounds as exist to revoke any contract, did not require arbitration because the prohibition on classwide proceedings was “unconscionable” under California law. The Supreme Court reversed, stating that arbitration agreements must be placed on equal footing with other contracts and California’s rule was preempted by the FAA and its strong federal policy favoring informal arbitration.

I’ll leave it to my colleagues Walter Olson, our expert on civil litigation, and Roger Pilon, who has written and spoken extensively on preemption, to comment on the particulars of the opinion if they wish. What I will say generally is that (1) we at Cato take the enforceability of contracts quite seriously, but (2) preemption is a very technical area of law that has to be examined on a case-by-case, statutory-provision-by-statutory-provision basis. See, for example, this Cato Supreme Court Review article from a few years ago, and also the relevant section of last year’s “Looking Ahead” essay that presciently previewed the Concepcion case (kudos to Erik Jaffe!). Finally, Roger will be writing an article piece on this term’s preemption cases for the next Review — but you’ll have to wait till Constitution Day in September for that!

A Deloitte Growth Enterprise Services survey of 527 executives at mid-market companies (annual revenues of between $50 million and $1 billion) found “tempered optimism” that the economic recovery will continue. However, the survey also found significant concern over government fiscal and regulatory policies.

A whopping 50 percent cited federal, state, and local debt as the greatest obstacle to U.S. growth in the coming year. Lack of consumer confidence (39 percent) and rising health care costs (33 percent) came in second and third. Lest anyone construe the executives’ concern about government debt as implied support for tax increases, high tax rates came in fourth at 30 percent. Government austerity, which can include tax increases, and infrastructure needs came in at 15 and 9 percent, respectively.

When asked to choose up to three items that represent their company’s main obstacle to growth, only 21 percent cited government budget cuts. I’m frankly surprised that the figure isn’t higher considering that a number of these companies probably “do business” with government. Increased regulatory compliance was only a tick higher at 22 percent. Health care costs came in third at 30 percent, and uncertain economic outlook was first at 41 percent. I would pin that uncertainty on government policies. It is likely that a substantial number of the respondents would agree given other survey results.

Reducing corporate tax rates (33 percent) was the clear winner when the executives were asked to choose up to two measures by the U.S. government that would most help mid-size businesses grow in the next year. Keeping interest rates low (32 percent) was close behind, followed by rolling back health care reform (23 percent). Keynesian measures that are popular in the White House, supporting increased infrastructure investment and stimulating private consumption, came in at 19 percent and 14 percent, respectively.

Finally, many, if not the majority, of respondents expect regulatory costs to increase next year, particularly in the area of health care reform. Respondents expect the president’s Affordable Care Act to sharply increase costs (33 percent) or slightly increase costs (33 percent). A majority (56 percent) expect tax compliance costs to increase. A near majority (49 percent) expect both economic and occupational health & safety regulatory costs to increase.

In sum, the good news is that optimism is on the rise in the business community. The bad news is that the heavy hand of government is still a dark cloud hovering over the recovery.

Last month, I described an unfortunate court ruling that let stand a Texas law designed to protect that state’s in-state liquor retailers from out-of-state competition, a holding that disregarded recent high-court precedent. This built on a podcast I had recorded about a year ago about the relationship between state alcohol regulation under the Twenty-First Amendment (which ended Prohibition) and the Commerce Clause.

As the Wall Street Journal describes today:

The federal government and states have been in a tug-of-war over alcohol regulation since the 21st Amendment passed in 1933. That amendment gave states the right to decide whether to go wet or stay dry. But the Supreme Court in 2005 came down decisively in favor of the feds in Granholm v. Heald. The Court struck down laws in New York and Michigan allowing in-state wineries to ship directly to consumers while forbidding out-of-state wineries from doing the same. The Court ruled that while the 21st amendment gives states the authority to regulate alcohol within their borders, the Constitution’s Commerce Clause bars them from erecting such protectionist barriers.

Still, many states have tried to circumvent Granholm, and the Texas law I previously wrote about is one example. Just like countries erect trade barriers to “help” domestic industries — at the expense of consumers and the economy as a whole — states engage in similar tactices. While the World Trade Organization doesn’t have any authority to police such internal matters, the U.S. Constitution sets out a perfectly good institution for dealing with these blatant Commerce Clause violations: the federal judiciary. And indeed, with some exceptions, courts since Granholm have “corked” protectionist state legislation.

But because Congress can’t leave well enough alone, and at the behest of liquor wholesalers (whose no-value-added middleman profits are obviously threatened by eliminating interstate trade barriers), we now have pending federal legislation called the Community Alcohol Regulatory Effectiveness (CARE) Act. This cutely titled bill purports to give more local control over alcohol regulation — to protect Baptists and bootleggers community values, children’s health, etc. — its actual purpose is to prevent out-of-state producers from selling directly to consumers around the country.

The CARE Act would eliminate the ability for alcohol producers and related businesses to challenge Commerce Clause violations in federal court. That’s not a good thing, as we’ve noticed in every other industry, such as insurance, where Congress has abdicated its constitutional authority to maintain the channels of interstate commerce clear of state interference. As the Journal again puts it:

You can bet your favorite case of California cabernet that Care will reduce choices and raise prices for consumers, just as McCarran-Ferguson has done in the insurance market. From what we’ve gathered through the grape vine, the main groups backing this bill are alcohol wholesalers. They serve as the middlemen in over 90% of transactions between wineries and retailers, and they account for up to 25% of the price of every bottle of wine. Wholesalers have convinced 57 Members of Congress, including 28 Republicans, to co-sponsor Care. Last year 153 Members, including 94 Democrats and 59 Republicans, co-sponsored a similar bill.

The trick here is that the wholesalers lobby is trying to play the “state sovereignty” clause, explaining that they’re just federalists trying to fight a one-size-fits-all national regulatory Leviathan. A clever maneuver in the Tea Party era, to be sure, but one that forgets that one of the main purposes of the Constitution — the very reason James Madison called the Constitutional Convention — was to eliminate interstate barriers to commerce; how else could the fledgling republic’s economy grow? 

Congress would never give states the power to stop Apple or J. Crew or any other retailer from shipping its products directly to consumers. It should be no different with alcohol.