Topic: Health Care & Welfare

It’s Time to End the Government’s Outsized Role in Housing Finance

Our government forays into the housing market have been a disaster, to say the least.

The mortgage interest deduction goes solely to the wealthy and costs the government nearly $100 billion a year. For some perspective of how out of whack this subsidy is, the residents of Nancy Pelosi’s pricey San Francisco neighborhood get roughly 100 times the benefit, per household, of the denizens of my middle class home town in central Illinois.

Of course, our government-sponsored enterprises are an even more ill-conceived subsidy for home buying. Fannie Mae and Freddie Mac ostensibly increase the amount of capital available to finance home buying by purchasing mortgages from banks and other mortgage originators, packaging them into mortgage-backed securities, and then selling them to pensions, hedge funds, and the like. But it is dubious that their existence meaningfully increases home ownership rates: The Census Bureau announced last month that the U.S. homeownership rate was 62.9 percent, its lowest since 1965 and well below most EU countries, virtually none of which has anything akin to either the mortgage interest deduction or government-sponsored enterprises buying up mortgages.

Not only does the MID and the GSEs fail to boost home ownership but they also can exacerbate broader problems in the housing market, and financial markets in general. The MID encourages people to purchase as much house as they can possibly afford in order to take full advantage of the tax break, which set up many people for disaster when they lost their job in the Great Recession of 2008-2009.

The pressure the federal government put on the GSEs to extend credit to low-income borrowers in order to help boost home ownership amongst the middle and lower-classes ended in tears for millions of Americans as well, as the swings in the housing market destroyed the value in their homes and left them unable to afford to continue living there.

The plunging home prices cratered the portfolio of the GSEs and led the Treasury to use the 2008 Home Equity and Recovery Act, or HERA, to place them into a conservatorship, with the shareholders seeing their share of the company slashed to just 20%, with the government assuming the rest. 

However, the demise of Fannie and Freddie was premature: the reported losses of the GSEs were just temporary, a fact that was clear to many shareholders who held onto their stock or jumped into the company post-crisis. For these people, holding onto the stock post-crisis appeared as if it would work out to be a good bet, especially once real estate prices returned to their previous levels.

Unfortunately for them such a bet failed to account for the vagaries of government action. In 2012 the Treasury imposed an amendment to HERA that effectively nationalized the GSEs and cut out the shareholders from any residual profits. The massive profits generated by Fannie Mae and Freddie Mac–which Treasury officials fully anticipated prior to the takeover–went directly into Treasury’s coffers, helping the Obama Administration claim a victory over the federal budget. The 2012 deficit was “just” $1.1 trillion, or $200 billion less than the previous year, helped by th outsized GSE profits that year.

Why Tax Credits Aren’t Controversial & Why They Should Be

Ah, tax credits. The answer to all of our environmental, social, and urban cares. Or so they say.

This spring, Senator Maria Cantwell (D-WA) and Senator Orrin Hatch (R-UT) cheerfully joined forces to expand the Low Income Housing Tax Credit (LIHTC) program. Their bill was subsequently referred to the Senate Finance Committee, which Hatch chairs. LIHTC provides select developers with tax credits for building affordable housing units, and the newly minted Affordable Housing Credit Improvement Act of 2016 would enlarge the LIHTC program by 50%, which puts the program at about $11 billion annually. If it’s anything like previous expansions of the program, it will surely draw broad bi-partisan support.

This brings us to a rather heartwarming aspect of tax credit programs more generally: tax credits appeal to democrats and republicans alike. In an age of acute political polarization, such collaboration seems to be the essence of civility and fraternization that the American public so longs for. Or is it?

Enter the alternative hypothesis: tax credits get a free pass because people think that tax credits are free. Unfortunately, as Milton Friedman said, TANSTAAFL, or “there ain’t no such thing as a free lunch,” and someone, somewhere paid for that hotdog and chips. So the question is who’s paying for tax credits?

The answer – if you’re not utilizing the credits – is probably you. That is because although select businesses or individuals are writing off taxes owed, the total U.S. tax burden is consistent or growing. Unlike across-the-board cuts that reduce taxes for everyone and are designed to support economic growth, LIHTC and other tax credit programs choose special businesses or individuals to reduce taxes for. So in the absence of reductions in spending, you’re just moving the money around, akin to any other direct subsidy (e.g. ethanol). When Uncle Sam needs to collect, the American tax payer is still on the hook.

Of course indirectly, we all “pay” for tax credits due to the slower economic growth caused by the misallocation of capital.

What’s more, tax credits operate outside of the annual Congressional appropriations process, and do not appear as an expenditure on the federal budget. In other words, a tax credit program may be completely ineffective at accomplishing program goals and never warrant so much as a side-eye come budget season.

This is particularly problematic for LIHTC, which National Bureau of Economic Research, Journal of Housing Economics, and Journal of Public Economics studies all found subsidize affordable units by displacing affordable units that would otherwise be provided by the private market. Economist Ed Glaeser agrees: “current research finds that LIHTC is not very effective along any important dimension—other than to benefit developers and their investors.” In other words, rather than improving welfare, LIHTC may actually just improve corporate welfare.

In the case of LIHTC and other tax credit programs, regular budgetary oversight would provide an opportunity to determine whether there is a better use for our collective resources, whether the program is achieving its objectives, and whether the country has the political will to continue supporting the program. Yet tax credit programs are protected from these basic questions by their very design.

And that is why tax credits are a problem. But out of sight on the federal budget outlay, out of mind. In the meantime, Congress will continue to play a cute little bipartisan game until American taxpayers get suspicious about all of that celebrated bipartisan collaboration happening in Washington. 

HUD’s Latest Proposal Is Big on Good Intentions & Unintended Consequences

Even when government has good intentions, it manages to muddle things up.

The U.S. Housing and Urban Development Department (HUD) has been applauded for its latest revision to its largest housing assistance program, the Housing Choice Voucher program. The new-and-ostensibly-improved program will provide larger housing subsidies to individuals that decide to live in wealthier neighborhoods, and smaller subsidies to individuals who decide to live in poor neighborhoods. The adjustment has already been piloted in five locations, and would be widely expanded (although HUD demurs on how widely).

On the surface, it sounds like a clever solution to an age-old concern. HUD is worried that dense concentrations of urban poverty – the type that often occurs in inner cities and historically occurred as a result of government housing projects – trap generations of residents in cycles of perpetual poverty.

In fact, the housing voucher program was devised to target this precise problem by providing individuals with a ticket they could use to rent housing anywhere in the United States. But through the years, HUD realized that although the voucher program provided choices, voucher recipients weren’t making the choices that HUD wanted – namely, moving out of low-income neighborhoods. The revised program will create the incentives required to make the choice for voucher recipients more … straightforward, shall we say… and redistribute low-income families across geographies.

Of course, the analysts at HUD aren’t the only ones worried that lack of residential mobility further entrenches low-income residents in poverty. The idea is at least as old as the fall of public housing in the 1970’s. But when it gets down to brass tacks the academic literature on the topic is less-than-satisfying, as described by the Moving to Opportunity study and the follow-up analysis by Katz, Kling, and Liebman and Clampet-Lundquist. Raj Chetty’s most recent work was hailed as proof that moving to wealthier neighborhoods has positive long-term impacts on children, but even it leaves something to be desired.  

Meanwhile, the evidence that HUD cites to support its latest proposal is essentially meaningless. Rather than grapple with the real question – whether a change of neighborhood can lift a family out of poverty – HUD cites early evidence that giving the poor money to move to wealthier neighborhoods helps them move to wealthier neighborhoods. Surprising no one.

But the discussion of evidence ignores one of the more fundamental concerns – basic equity issues. First, seventy-five percent of Americans that qualify for housing assistance don’t receive it. And housing assistance is worth thousands of dollars annually to the lucky few who are selected, generally through a lottery or multi-year waitlist. Under the revised program, those that do receive assistance will be provided an even more oversized benefit (as compared with their ill-fated, voucherless peers) than they were before, assuming they decide to live in the wealthier neighborhood.

Want to End War? Privatize the VA.

A while back, the Cato Institute’s vice president for defense and foreign policy studies and director of health policy studies took to the pages of the New York Times to explain why privatizing the Veterans Health Administration would lead to less war and better health care for veterans. 

Today in The Hill, I discuss why this proposal has enduring relevance:

As Britain Tries to Learn from Iraq Mistakes, So Should the U.S. — by Privatizing the VA

[…]

Many Democrats remain angry with their presumptive presidential nominee Hillary Clinton for voting as a U.S. senator from New York to authorize the Iraq invasion in 2002. Clinton later wrote, “I had acted in good faith and made the best decision I could with the information I had … But I still got it wrong.”

There is a reform that could have given Clinton and other policymakers better information about the costs of invading Iraq – information that could conceivably have prevented the invasion altogether or at least shortened the U.S. occupation.

Read the whole thing.

If Black Lives Matter, Repeal the Minimum Wage

The civil unrest following last week’s police shootings of black men in Louisiana and Minnesota, followed by the sniper attack on police officers in Dallas, has sparked a new bout of public concern over the hardships of Black America. Those hardships include significantly higher violent crime victimizationhigher joblessness, higher poverty, and lower income than the general U.S. population.

Previous moments of such concern have prompted politicians to respond with the standard, tired slate of policies that supposedly would “empower” and “lift” African Americans. All too often, those policies mainly empowered government employees and vendors, while the gap between Black America and the rest of the country remains. By the time the policy failures became obvious, public and political interest had waned, and little else happened until new headlines brought new concern.

Perhaps this time will be different, and policymakers will try some different ideas that might actually help. Cato offers many recommendations for reforming education, criminal justice, and the social safety net that would especially help black Americans.

To those, add this simple, seemingly counterintuitive recommendation: repeal the minimum wage.

Though some politicians deny it, the link between the minimum wage and unemployment is well established; denying that empirical research is akin to denying the research on climate change. Among the findings is that the minimum wage’s detrimental effects fall hardest on young black males: the same group that suffers some of the worst hardships of Black America. Perhaps if they had greater opportunities to take starter jobs that would give them both income and the work experience that leads to better-paying jobs, they’d have a better chance to escape violence and poverty. (Meanwhile, far too many young African American males are pushed into the black market, where they earn sub-minimum wages for dangerous work.) Indeed, the empirical work suggests that there’s a direct causal relationship between the minimum wage and crime.

Repealing the minimum wage for the sake of black youth would be a great piece of historical closure. The minimum wage was established, in part, to push blacks and women out of jobs that progressives believed should go to white family men. The economic struggles of African Americans today reflect, in part, how well the progressives’ plan worked.

ObamaCare: Not Promoting Quality Care As Planned

At The Health Care Blog, Jeff Goldsmith and Bruce Henderson of Navigant Healthcare offer a grim assessment of ObamaCare’s performance that is worth quoting at length:

The historic health reform law passed by Congress and signed by President Obama in March, 2010 was widely expected to catalyze a shift in healthcare payment from “volume to value” through multiple policy changes. The Affordable Care Act’s new health exchanges were going to double or triple the individual health insurance market, channeling tens of millions of new lives into new “narrow network” insurance products expected to evolve rapidly into full risk contracts.

In addition, the Medicare Accountable Care Organization (ACO) program created by ACA would succeed in reducing costs and quickly scale up to cover the entire non-Medicare Advantage population of beneficiaries (currently about 70% of current enrollees) and transition provider payment from one-sided to global/population based risk. Finally, seeking to avoid the looming “Cadillac tax” created by ACA, larger employers would convert their group health plans to defined contribution models to cap their health cost liability, and channel tens of millions of their employees into private exchanges which would, in turn, push them into at-risk narrow networks organized around specific provider systems. 

Three Surprising Developments
Well, guess what? It is entirely possible that none of these things may actually come to pass or at least not to the degree and pace predicted. At the end of 2015, a grand total of 8.8 million people had actually paid the premiums for public exchange products, far short of the expected 21 million lives for 2016. As few as half this number may have been previously uninsured. It remains to be seen how many of the 12.7 million who enrolled in 2016’s enrollment cycle will actually pay their premiums, but the likely answer is around ten million. Public exchange enrollment has been a disappointment thus far, largely because the plans have been unattractive to those not eligible for federal subsidy. 

Moreover, even though insurers obtained deep discounts from frightened providers for the new narrow network exchange products (70% of exchange products were narrow networks), the discounts weren’t deep enough to cover the higher costs of the expensive new enrollees who signed up. Both newly launched CO-OP plans created by ACA and experienced large carriers like United and Anthem were swamped in poor insurance risks, and lost hundreds of millions on their exchange lives. As for the shifting of risk, it looks like 90% plus of these new contracts were one-sided risk only, shadowing and paying providers on the basis of fee-for-service, with bonuses for those who cut costs below spending targets. Only 10% actually penalized providers for overspending their targets.

The Medicare Accountable Care Organization/Medicare Shared Savings Program, advertised as a bold departure from conventional Medicare payment policy, has been the biggest disappointment among the raft of CMS Innovation Center initiatives. ACO/MSSP enrollment appears to have topped out at 8.3 million of Medicare’s 55 million beneficiaries. The first wave, the Pioneer ACOs, lost three-fourths of their 32 original participating organizations, including successful managed care players like HealthCare Partners, Sharp Healthcare, and Presbyterian Healthcare of New Mexico and others. The second, much larger wave of regular MSSP ACO participants lost one third of their renewal cohort. Only about one-quarter of ACO/MSSP participants generated bonuses, and those bonuses were highly concentrated in a relative handful of successful participants. 

Of the 477 Medicare ACO’s, a grand total of 52, or 11%, have downside risk, crudely analogous to capitation. As of last fall, CMS acknowledged that factoring in the 40% of ACO/MSSP members who exceeded their spending targets and the costs of the bonuses paid to the ACOs who met them, the ACO/MSSP programs have yet to generate black ink for the federal budget. And this does not count the billions care systems have spent in setting up and running their ACOs. It is extremely unlikely that the Medicare ACO program will be made mandatory, or voluntarily grow to replace DRGs and the Medicare Part B fee schedule. 

And the Cadillac Tax, that 40% tax imposed by ACA on high cost employee benefit plans, a potentially transformative event in the large group health insurance market, which was scheduled to be levied in 2018, was “postponed” for two years (to 2020) by an overwhelming Congressional vote. In the Senate, a 90-10 bipartisan majority actually voted to kill the tax outright, strongly suggesting that strong opposition from unions and large employers will prevent the tax from ever being levied. Presumptive Democratic nominee Hillary Clinton has announced her support for killing the tax. So the expected transformative event in the large group market has proven too heavy a lift for the political system. 

As a result, the enrollment of large group workers in private health exchanges, the intended off-ramp for employers with Cadillac tax problems, has arrested at about 8 million, one-fifth of a recent forecast of 40 million lives by 2018. Thus, the conversion of the enormous large group market members to narrow network products seems unlikely to happen. As a recent New York Times investigation revealed, the reports of the demise of traditional group health insurance coverage (based on broad network PPO models) have been greatly exaggerated.

Reason on the House GOP Health Plan: “Like Obamacare—Except, Possibly, Worse”

Echoing concerns I expressed last week, Reason’s Peter Suderman notices a problem with House Republicans’ new plan to replace ObamaCare:

As it turns out, the health care policy that Republicans might pursue looks, well, a lot like Obamacare—except, possibly, worse.

Rather than offer ObamaCare-lite, Congress should repeal ObamaCare and then make health care better, more affordable, and more secure by moving toward a market system.
 
Sen. Jeff Flake (R-AZ) and Rep. Dave Brat (R-VA) have introduced legislation that contains the building blocks of such an approach.