There is an interesting game theoretic aspect to the current state of health care reform legislation (aka Obamacare). The Democrats need to pass the Senate bill in the House first, and only then can they fix the provisions currently unacceptable to the House with a followup bill that needs to pass both the Senate and the House. The controversy about reconciliation concerns using reconciliation to pass the followup bill in the Senate with 50 votes (our clownish vice-president would cast the tie-breaking vote, so 50 is all the Democrats need).
Many consider this use of reconciliation to be illegitimate, since it is facilitating the passage of sweeping legislation that doesn't even come close to meeting the eligibility requirements for circumventing the Senate filibuster. I don't agree on that specific point. Although it's a close call, using reconciliation to fix budget-related aspects of the bill in order to attract more votes in the House strikes me as reasonable. After all, the House still has to pass the Senate bill without any guarantees whatsoever. If Democrats tried to do it the other way around -- pass a reconciliation bill first, then I think that would be an egregious attempt at circumvention of the filibuster.
That being said, there is a strong argument that the bill is illegitimate as it stands. There is no doubt that it wouldn't have received 60 votes in the Senate if not for the presence of outrageous provisions used to bribe individual senators. Everybody is rebelling against those provisions now and wants them stripped out of the bill, even some of the senators that negotiated them in the first place, but the bill would not have passed the Senate without them.
For the game theory aspect of Obamacare, I'm going to assume that the Republicans actually have a way of severely impeding a reconcilation bill. I believe this is true. One way is to raise points of order repeatedly against reconciliation bill provisions for violating the Byrd rule. A second is to offer hundreds of amendments to the bill after time for debate has elapsed. Each of these amendments takes a minimum of 15 minutes to vote on, and so it is possible to kill an entire legislative day with 50 or 60 relevant amendments. Do this for long enough, and the Senate grinds to a halt.
Given that the Republicans might actually have it in their power to obstruct a reconciliation bill, the Republican dilemma is as follows:
1) the Senate bill would not pass if House Democrats believed the bill would remain as it is and not be amended immediately; there are just too many House Dems who would vote no on the Senate bill all by itself;
2) some of the most important amendments that skeptical House Dems want to see are provisions that Republicans and the general public support (e.g. stronger restrictions on abortion funding, elimination of the Cornhusker Kickback, Louisiana Purchase, and the Florida Flim-Flam and weakening of the mandate to buy insurance);
3) if enough House Dems think that the Republicans will be forced to allow those amendments to pass, the Senate bill will pass the House.
Essentially the House Dems will play a game of chicken with Senate Republicans. They go first and put the Senate Republicans in a position of having to obstruct popular measures that Republicans themselves support.
The Republicans' quandary is similar to that of the United States during the cold war. How did the United States convince the Soviet Union that it would respond to a ground invasion of Western Europe with a nuclear escalation? Once the invasion is underway after all, the logical decision for the US is not to escalate.
The solution of course is to implement elaborate protocols to convince the other side of the credibility of the threat of retaliation. The United States developed a whole strategy built around nuclear retaliation in Europe.
It kept a few hundred thousand troops on the front lines, which was a force way too small to stop an invasion, but large enough to create a terrible bloodbath for the US if the Soviet Union invaded. The nuclear retaliation strategy was developed in detail at conferences, in military schools, and in the academic literature. And it was widely publicized and discussed by high officials in the US and in Europe, including by US presidents.
All of this was effective in preparing the public for the inevitability of nuclear retaliation and for putting the president of the US on autopilot for following the protocol. As a consequence, the threat was credible to the Soviet Union and functioned effectively as deterrence.
The Senate Republicans can play this game correctly by laying out their strategy of obstruction in advance and publicizing it widely. They need to publicize the points of order they will raise, as well as the hundreds of amendments they'll have prepared to delay a vote on the reconciliation bill. It strikes me as easy to propose thousands of non-frivolous amendments, by the way. All you have to do is propose reducing spending on items in this year's or next year's budget, one at a time.
Monday, March 8, 2010
Saturday, February 13, 2010
The Treasury Prints Bonds Like the Fed Prints Cash
In the wake of Warren Mosler's recent interview on CNBC's Squawk Box, I thought it made sense to clarify a point about government "borrowing." I put the word borrowing in quotes of course because the government is not really borrowing money when it issues Treasury securities. Mosler tried to explain this by running through the way Federal Reserve accounting worked, but I am afraid that most people's eyes glazed over. Certainly Becky Quick at CNBC had no idea what he was talking about.
Generally, people understand that the government retains the power (through the Federal Reserve) to print as much as cash as it wants to buy Treasury bonds and therefore to monetize the public debt. What is not widely understood, though, is that the Treasury itself can spend as much money as it wants without forcing the Fed to do anything at all. We can have laws that arbitrarily prevent the Treasury from printing cash (and we do to a certain extent), but that still does not constrain the Treasury from spending an unlimited amount of money.
How can that be if the Treasury has to raise the cash first from tax revenues or the issuance of Treasury bonds? What if investors, or the Chinese in particular, decide not to buy new Treasury bonds? Well, let's think about what happens when the Treasury's Federal Reserve account is completely depleted, and it wants to spend an additional dollar:
It has an auction for $1 worth of Treasury securities. An investor, usually a bank which has extra cash sitting around in danger of earning 0% interest overnight, bids some positive interest rate in the auction and buys it.
The investor has $1 worth of Treasury securities, and the investor's bank account is debited by $1, which means also that his bank's account at the Federal Reserve is debited by $1 (or, if it is a smaller bank which does not have a Reserve account, there is a debit in that bank's account at a bigger bank, etc.). And the Treasury has $1 credited to its Reserve account.
The Treasury now spends that $1 by transferring it to the bank account of whoever the recipient is (whether it be a social security beneficiary, a doctor who performed Medicare services, a construction company working on a stimulus project, or a bribe to the head of a union who promises to "get out the vote" for a Democratic candidate).
Now, that dollar looks like a credit in the recipient's bank account, but it is also (following the upward chain of accounts) a credit to a big bank's account at the Federal Reserve.
So the total amount of bank reserves at the Fed remains the same. All that has happened is that the total amount of Treasury securities has increased by $1.
Note that the analysis is unchanged if the recipient of the Treasury's largess decides to spend or invest his windfall. Whoever he buys goods or services or stocks from will now have the credit in his bank account and therefore in his bank's Federal Reserve account.
It should be clear by now that the money that the Treasury spent has essentially gone to fund the purchase of the Treasury security which the Treasury originally issued to raise the money to spend in the first place.
It is a perpetual motion machine, and by induction we can see that the Treasury can spend any amount of money and the accounting effect of that spending is that the Treasury prints an amount of Treasury securities equal to the amount of its deficit spending.
We have argued in the past that a Treasury security is not fundamentally different from cash. It is a government IOU, same as cash, except that it earns a positive interest rate rather than no interest. It's true that you can't spend a Treasury bond as easily as cash, but the Federal Reserve stands ready to lend to any member bank an unlimited amount of cash against an equivalent market value of Treasury bonds at slightly below the Fed's target interest rates, so the link between Treasuries and spendable cash is very strong.
So the Treasury's ability to print bonds is equivalent to the ability to print money. By itself, it can increase private sector net financial wealth.
Generally, people understand that the government retains the power (through the Federal Reserve) to print as much as cash as it wants to buy Treasury bonds and therefore to monetize the public debt. What is not widely understood, though, is that the Treasury itself can spend as much money as it wants without forcing the Fed to do anything at all. We can have laws that arbitrarily prevent the Treasury from printing cash (and we do to a certain extent), but that still does not constrain the Treasury from spending an unlimited amount of money.
How can that be if the Treasury has to raise the cash first from tax revenues or the issuance of Treasury bonds? What if investors, or the Chinese in particular, decide not to buy new Treasury bonds? Well, let's think about what happens when the Treasury's Federal Reserve account is completely depleted, and it wants to spend an additional dollar:
It has an auction for $1 worth of Treasury securities. An investor, usually a bank which has extra cash sitting around in danger of earning 0% interest overnight, bids some positive interest rate in the auction and buys it.
The investor has $1 worth of Treasury securities, and the investor's bank account is debited by $1, which means also that his bank's account at the Federal Reserve is debited by $1 (or, if it is a smaller bank which does not have a Reserve account, there is a debit in that bank's account at a bigger bank, etc.). And the Treasury has $1 credited to its Reserve account.
The Treasury now spends that $1 by transferring it to the bank account of whoever the recipient is (whether it be a social security beneficiary, a doctor who performed Medicare services, a construction company working on a stimulus project, or a bribe to the head of a union who promises to "get out the vote" for a Democratic candidate).
Now, that dollar looks like a credit in the recipient's bank account, but it is also (following the upward chain of accounts) a credit to a big bank's account at the Federal Reserve.
So the total amount of bank reserves at the Fed remains the same. All that has happened is that the total amount of Treasury securities has increased by $1.
Note that the analysis is unchanged if the recipient of the Treasury's largess decides to spend or invest his windfall. Whoever he buys goods or services or stocks from will now have the credit in his bank account and therefore in his bank's Federal Reserve account.
It should be clear by now that the money that the Treasury spent has essentially gone to fund the purchase of the Treasury security which the Treasury originally issued to raise the money to spend in the first place.
It is a perpetual motion machine, and by induction we can see that the Treasury can spend any amount of money and the accounting effect of that spending is that the Treasury prints an amount of Treasury securities equal to the amount of its deficit spending.
We have argued in the past that a Treasury security is not fundamentally different from cash. It is a government IOU, same as cash, except that it earns a positive interest rate rather than no interest. It's true that you can't spend a Treasury bond as easily as cash, but the Federal Reserve stands ready to lend to any member bank an unlimited amount of cash against an equivalent market value of Treasury bonds at slightly below the Fed's target interest rates, so the link between Treasuries and spendable cash is very strong.
So the Treasury's ability to print bonds is equivalent to the ability to print money. By itself, it can increase private sector net financial wealth.
Tuesday, January 12, 2010
Krugman's Claim that Europe Does as Well as the US
Krugman argues here that Europe's economy is just as productive and vibrant as the United States' even though Europe is saddled with high taxes, a generous social safety net, and a generally greater role for government in the economy.
His evidence is that even though the United States' growth rate in GDP over the last 15 years appears to be higher than Europe's, if one adjusts for the growth in population, the GDP growth rates are almost identical.
I give Krugman credit for bringing up the reasonable idea of making an adjustment for population growth. I have argued for many years that Japan's "lost decade" in the 1990s, in which its GDP growth rate was approximately 1.5 pts less than ours, could be explained almost entirely by the difference in our population growth rates.
Of course, one could argue that a low population growth rate is a consequence of having poor economic policies. Immigration to your country is less attractive to foreigners than it would otherwise be, and perhaps residents are discouraged from having children.
That being said, the whole idea of comparing growth rates to see which economy is more efficient is stupid. One should look at the overall GDP per capita, wealth level, and standard of living to gauge which economy is doing better. The growth rate is not really of much importance if your standard of living is 28% lower. See here for a list of countries ranked by GDP per capita adjusted for purchasing power parity (PPP).
On top of that, it would seem that growing at the same rate is no great accomplishment for an economy operating at lower productivity. It is much easier to copy what works from a more efficient economy (as the Soviet Union did in the 1930s from the West, as Japan did in the 1950s and 1960s from the United States, and as China is doing now from everybody).
Just to make a simple comparison, France's GDP per capita (PPP adjusted) is 28% lower than that of the US's. That's what we should be focused on -- not whether France has just barely managed to match our GDP growth rate over the last 15 years. The French are still poorer on average, and the most likely reason is the stifling amount of government control over their economy.
Oh, and one final note. The Europeans are getting a free ride off of the United States in many ways, and yet they still have a lower standard of living. The main area is defense, where the US essentially shoulders the entire burden of keeping the world peace.
His evidence is that even though the United States' growth rate in GDP over the last 15 years appears to be higher than Europe's, if one adjusts for the growth in population, the GDP growth rates are almost identical.
I give Krugman credit for bringing up the reasonable idea of making an adjustment for population growth. I have argued for many years that Japan's "lost decade" in the 1990s, in which its GDP growth rate was approximately 1.5 pts less than ours, could be explained almost entirely by the difference in our population growth rates.
Of course, one could argue that a low population growth rate is a consequence of having poor economic policies. Immigration to your country is less attractive to foreigners than it would otherwise be, and perhaps residents are discouraged from having children.
That being said, the whole idea of comparing growth rates to see which economy is more efficient is stupid. One should look at the overall GDP per capita, wealth level, and standard of living to gauge which economy is doing better. The growth rate is not really of much importance if your standard of living is 28% lower. See here for a list of countries ranked by GDP per capita adjusted for purchasing power parity (PPP).
On top of that, it would seem that growing at the same rate is no great accomplishment for an economy operating at lower productivity. It is much easier to copy what works from a more efficient economy (as the Soviet Union did in the 1930s from the West, as Japan did in the 1950s and 1960s from the United States, and as China is doing now from everybody).
Just to make a simple comparison, France's GDP per capita (PPP adjusted) is 28% lower than that of the US's. That's what we should be focused on -- not whether France has just barely managed to match our GDP growth rate over the last 15 years. The French are still poorer on average, and the most likely reason is the stifling amount of government control over their economy.
Oh, and one final note. The Europeans are getting a free ride off of the United States in many ways, and yet they still have a lower standard of living. The main area is defense, where the US essentially shoulders the entire burden of keeping the world peace.
Sunday, January 10, 2010
Why Didn't the Tech Bubble Cause a Financial Crisis?
On Friday, Paul Krugman had this to say about why the collapse of the tech stock bubble in 2000 didn't bring about the same sort of financial crisis we just experienced.
The true short answer is that the Nasdaq bubble collapse was not an outlier event. It was seen as a reasonably high probability event by everybody throughout the financial system. Options on internet stocks were trading with implied volatility of hundreds of percent per annum, and long-term options on even the boring S&P 500 index were trading at over 20% implied volatility -- extraordinarily high by historical standards. So when the Nasdaq fell over 75% and the S&P fell almost 50% over a period of 18 months, financial professionals were not terribly surprised.
Here's another way to put it. No bank or money manager fund was making non-recourse loans on a stock with a 20% downpayment and no ability to demand variation margin. Yet, that's what a traditional, conservative mortgage on a home is essentially. So when stocks fall 50%, it's not a big shock to the financial system. Few people consider stock market wealth to be as real or as stable as AAA-rated bonds for example.
Homes, on the other hand, had enjoyed low price volatility and had not fallen in nominal price on a nationwide basis since World War II. So when homes across the country fall 35% in nominal price (and over 50% if you look at where most of the mortgage loans were made), this is obviously going to cause a lot of distress throughout the financial system. AAA-rated bonds went from 100 cents on the dollar to 10 cents in some cases. The entities owning AAA-rated bonds did not think they were taking risk. Losses like that simply did not appear on their radar screens. This was very different from the wealth destruction during the tech bubble collapse.
All things considered, I'd have to say that the turmoil caused by the housing fiasco has been pretty mild. The reason is that we have the advantage of a fiat currency system, in which the government can print money at will. The government has made a lot of mistakes which exacerbated the problem, but since the collapse of Lehman in September 2008, the Fed has handled things relatively well (the Treasury less so, but it's done more good than harm).
Krugman's op-eds are usually infuriating because he writes a lot of false stuff that he knows to be false. In this case, I'm willing to concede that he genuinely doesn't understand what he's talking about.The short answer is that while the stock bubble created a lot of risk, that risk was fairly widely diffused across the economy. By contrast, the risks created by the housing bubble were strongly concentrated in the financial sector. As a result, the collapse of the housing bubble threatened to bring down the nation’s banks. And banks play a special role in the economy. If they can’t function, the wheels of commerce as a whole grind to a halt.
Why did the bankers take on so much risk? Because it was in their self-interest to do so. By increasing leverage — that is, by making risky investments with borrowed money — banks could increase their short-term profits. And these short-term profits, in turn, were reflected in immense personal bonuses. If the concentration of risk in the banking sector increased the danger of a systemwide financial crisis, well, that wasn’t the bankers’ problem.
The true short answer is that the Nasdaq bubble collapse was not an outlier event. It was seen as a reasonably high probability event by everybody throughout the financial system. Options on internet stocks were trading with implied volatility of hundreds of percent per annum, and long-term options on even the boring S&P 500 index were trading at over 20% implied volatility -- extraordinarily high by historical standards. So when the Nasdaq fell over 75% and the S&P fell almost 50% over a period of 18 months, financial professionals were not terribly surprised.
Here's another way to put it. No bank or money manager fund was making non-recourse loans on a stock with a 20% downpayment and no ability to demand variation margin. Yet, that's what a traditional, conservative mortgage on a home is essentially. So when stocks fall 50%, it's not a big shock to the financial system. Few people consider stock market wealth to be as real or as stable as AAA-rated bonds for example.
Homes, on the other hand, had enjoyed low price volatility and had not fallen in nominal price on a nationwide basis since World War II. So when homes across the country fall 35% in nominal price (and over 50% if you look at where most of the mortgage loans were made), this is obviously going to cause a lot of distress throughout the financial system. AAA-rated bonds went from 100 cents on the dollar to 10 cents in some cases. The entities owning AAA-rated bonds did not think they were taking risk. Losses like that simply did not appear on their radar screens. This was very different from the wealth destruction during the tech bubble collapse.
All things considered, I'd have to say that the turmoil caused by the housing fiasco has been pretty mild. The reason is that we have the advantage of a fiat currency system, in which the government can print money at will. The government has made a lot of mistakes which exacerbated the problem, but since the collapse of Lehman in September 2008, the Fed has handled things relatively well (the Treasury less so, but it's done more good than harm).
Friday, January 1, 2010
Are Cars More Dangerous Than Terrorists?
A reader of Andrew Sullivan's daily dish had this to say in response to Bill Maher's point that cars are more dangerous than terrorists.
The first reason that the analogy is simplistic is that the car is a necessity in modern life. The benefit we derive from cars vastly outweighs the cost. In terms of deaths and injuries, cars almost certainly save far more lives than they end prematurely. There is no benefit to us from terrorism that I can think of, but plenty of costs in addition to the direct damage and fatalities. Second, most car-related casualties happen due to negligence or recklessness, and those casualties usually happen to the people who are directly responsible. One can reduce the risk of traveling in a car dramatically by wearing a seatbelt, driving carefully, and maintaining the car in good working order. Third, society has already come to terms with the risk. This is not something that can be easily duplicated in other areas. Traveling by plane is still far safer than driving the equivalent number of miles in a car, but far more people are afraid of dying in a plane crash than in a car crash. This may be irrational, but it is a reality. Terrorists can dramatically raise the fear associated with flying (rational or not), and if they do that they can degrade our standard of living as they already have done to a significant extent since 9/11.
Finally, it is not clear how effective terrorists can be if they become encouraged by success. The daily dish reader is correct that it is extremely unlikely terrorists could cause as many deaths per year as cars do simply by blowing up planes. But success at blowing up planes encourages more people to join the terrorist/jihadist cause and emboldens the leaders of that cause. It's possible that such success actually increases the probability of nuclear terrorism. Even Bill Maher would understand that a small nuclear explosion in a US city would dramatically change our society for the worse.
The argument that we shouldn't worry so much about terrorism because cars kill more people than terrorists is seductive to faux intellectuals like Bill Maher. The more general point is that we as a society accept all kinds of risks which are greater than the historical, statistical danger due to terrorism. I'll focus on the comparison to cars because, as far as we know today, the largest risk of violent death in the US comes from car accidents.In 2008 there were 34,017 deaths (and nearly 100,000 major injuries) related to automobile accidents in the United States. Terrorists would have to blow up 113 Boeing 777-200s each year in order to kill that many people! That is, they'd have to blow up all but six of the 777-200's (which hold 301 people in a 3-tier international setup) currently owned by American Airlines, United Airlines and Continental Airlines (together they own 119 777-200s) and would have to do so every single year, which is probably faster than they can be built. And yet there is hardly any talk of defending the American people from their Buick!
The first reason that the analogy is simplistic is that the car is a necessity in modern life. The benefit we derive from cars vastly outweighs the cost. In terms of deaths and injuries, cars almost certainly save far more lives than they end prematurely. There is no benefit to us from terrorism that I can think of, but plenty of costs in addition to the direct damage and fatalities. Second, most car-related casualties happen due to negligence or recklessness, and those casualties usually happen to the people who are directly responsible. One can reduce the risk of traveling in a car dramatically by wearing a seatbelt, driving carefully, and maintaining the car in good working order. Third, society has already come to terms with the risk. This is not something that can be easily duplicated in other areas. Traveling by plane is still far safer than driving the equivalent number of miles in a car, but far more people are afraid of dying in a plane crash than in a car crash. This may be irrational, but it is a reality. Terrorists can dramatically raise the fear associated with flying (rational or not), and if they do that they can degrade our standard of living as they already have done to a significant extent since 9/11.
Finally, it is not clear how effective terrorists can be if they become encouraged by success. The daily dish reader is correct that it is extremely unlikely terrorists could cause as many deaths per year as cars do simply by blowing up planes. But success at blowing up planes encourages more people to join the terrorist/jihadist cause and emboldens the leaders of that cause. It's possible that such success actually increases the probability of nuclear terrorism. Even Bill Maher would understand that a small nuclear explosion in a US city would dramatically change our society for the worse.
Wednesday, December 23, 2009
The 85% Solution
It almost goes without saying that the health care reform (HCR) bill that is about to pass the Senate is extraordinarily bad policy. The perceived problem we have with health care in this country is exploding cost. Health care expenditures continue to rise much faster than the rate of inflation.
Now this is not on its face an unacceptable situation. As a country becomes wealthier, it might make sense for a larger and larger fraction of its GDP to be spent on health care. There is an easily approachable limit to how much food, shelter, and I-Phones a person can consume, but given the fact that we all grow old, get sick, and die, the limit to how much health care we can consume over our lifetime is high enough that we won't be bumping against it for quite some time.
But I think most people agree (although perhaps for the wrong reasons) that there is something horribly awry with our current system. Costs are rising much faster than they should, and there are probably some simple adjustments that could be made to contain costs and make health care more affordable.
Anyway, rising health care costs are perceived to be the problem. So, what does the HCR bill do? It subsidizes consumers and taxes providers and producers. That's right, it artificially stimulates demand for health care, and enacts new taxes and fees which artificially suppresses the supply of health care resources.
Brilliant! This ranks right up there with Cash for Clunkers as a textbook case of fallacious reasoning in economics.
That said, I wanted to focus on just one small part of the HCR bill which highlights the lack of thought that goes into the crafting of such legislation. The provision to which I refer requires, in the words of Senator Al Franken, "... health insurance companies to spend 85% of premiums on actual health services -- not administrative costs, TV ads, or gargantuan CEO bonuses..."
No doubt Harry Reid and his pals have put a lot of thought into that number 85% (sorry if i dripped sarcasm on the page here), but isn't it amazing that a government bureaucrat could come up with a single number like that which works for the whole country and for all large group insurance plans (of course, the states will be given the freedom to raise the bar even higher, although one hopes that 100% will be understood as a natural limit)?
Now, one might expect a somewhat more precise and legalistic definition of the phrase "actual health services" in the "actual" bill, and here it is:
(1) on reimbursement for clinical services provided to enrollees under such coverage; [and]
(2) for activities that improve health care quality;
Well that clears it up. Let's do something novel and try to put ourselves in the shoes of a rational human being for a minute, one that responds to incentives and tries to game the wording of vague regulations.
You're the CEO of a health insurance company, and Congress tells you that you have to spend at least 85% of your premium revenue on health care services or activities that improve health care quality. You can do math, so you quickly determine that the amount of money available for other expenses, salaries, and profits is at most (100%-85%)*(total premiums) = (100%-85%)*(total expenditures for health care servides)/85% = 17.65% * (total expenditures for health care services).
The amount of money available scales linearly with total health care expenditures, which is interesting. Now if you can just find a way to spend more on health care, without increasing your administrative and marketing expenses, you can pay yourself, your employees, and your stockholders more money. Hmmm.
Suppose you cut co-pays and deductibles and encourage your customers to get more health care. You could pay doctors more too, and even fund all kinds of ridiculous perquisites for doctors under the category "activities that improve health care quality."
Of course you would have to raise health care premiums for all this to work, and normally you would be constrained by competition from other health care insurance providers. But under the new law, all of the other providers would be thinking the same way. All the incentives are now skewed towards increasing health care benefits and costs, with commensurately higher premiums to pay for it all.
The intent of this language, I guess, was to provide an incentive to insurance companies to cut administrative expenses. But that incentive was always there. All this provision will manage to do is remove any incentive to cut costs for "actual" health care services. Perversely, it does the opposite.
Now this is not on its face an unacceptable situation. As a country becomes wealthier, it might make sense for a larger and larger fraction of its GDP to be spent on health care. There is an easily approachable limit to how much food, shelter, and I-Phones a person can consume, but given the fact that we all grow old, get sick, and die, the limit to how much health care we can consume over our lifetime is high enough that we won't be bumping against it for quite some time.
But I think most people agree (although perhaps for the wrong reasons) that there is something horribly awry with our current system. Costs are rising much faster than they should, and there are probably some simple adjustments that could be made to contain costs and make health care more affordable.
Anyway, rising health care costs are perceived to be the problem. So, what does the HCR bill do? It subsidizes consumers and taxes providers and producers. That's right, it artificially stimulates demand for health care, and enacts new taxes and fees which artificially suppresses the supply of health care resources.
Brilliant! This ranks right up there with Cash for Clunkers as a textbook case of fallacious reasoning in economics.
That said, I wanted to focus on just one small part of the HCR bill which highlights the lack of thought that goes into the crafting of such legislation. The provision to which I refer requires, in the words of Senator Al Franken, "... health insurance companies to spend 85% of premiums on actual health services -- not administrative costs, TV ads, or gargantuan CEO bonuses..."
No doubt Harry Reid and his pals have put a lot of thought into that number 85% (sorry if i dripped sarcasm on the page here), but isn't it amazing that a government bureaucrat could come up with a single number like that which works for the whole country and for all large group insurance plans (of course, the states will be given the freedom to raise the bar even higher, although one hopes that 100% will be understood as a natural limit)?
Now, one might expect a somewhat more precise and legalistic definition of the phrase "actual health services" in the "actual" bill, and here it is:
(1) on reimbursement for clinical services provided to enrollees under such coverage; [and]
(2) for activities that improve health care quality;
Well that clears it up. Let's do something novel and try to put ourselves in the shoes of a rational human being for a minute, one that responds to incentives and tries to game the wording of vague regulations.
You're the CEO of a health insurance company, and Congress tells you that you have to spend at least 85% of your premium revenue on health care services or activities that improve health care quality. You can do math, so you quickly determine that the amount of money available for other expenses, salaries, and profits is at most (100%-85%)*(total premiums) = (100%-85%)*(total expenditures for health care servides)/85% = 17.65% * (total expenditures for health care services).
The amount of money available scales linearly with total health care expenditures, which is interesting. Now if you can just find a way to spend more on health care, without increasing your administrative and marketing expenses, you can pay yourself, your employees, and your stockholders more money. Hmmm.
Suppose you cut co-pays and deductibles and encourage your customers to get more health care. You could pay doctors more too, and even fund all kinds of ridiculous perquisites for doctors under the category "activities that improve health care quality."
Of course you would have to raise health care premiums for all this to work, and normally you would be constrained by competition from other health care insurance providers. But under the new law, all of the other providers would be thinking the same way. All the incentives are now skewed towards increasing health care benefits and costs, with commensurately higher premiums to pay for it all.
The intent of this language, I guess, was to provide an incentive to insurance companies to cut administrative expenses. But that incentive was always there. All this provision will manage to do is remove any incentive to cut costs for "actual" health care services. Perversely, it does the opposite.
Tuesday, November 17, 2009
Does Lack of Health Insurance Cause 45K Deaths Per Year in the US?
This paper has been cited by a lot of people recently, including Nicholas Kristof in his November 12th op-ed (I'll have more to say about Kristof later as he has been spreading health care falsehoods under the guise of countering health care myths).
The research has been interpreted as demonstrating that approximately 45K people die every year in the US because of lack of health insurance.
This is almost certainly wrong.
I note the following points to keep in mind about the paper:
1) the principal author is PNHP (Physicians for a National Health Plan) founder Dr. David Himmelstein;
2) in the paper itself the authors do not claim to have shown a causal relationship between lack of health insurance and higher mortality; they only claim to have shown that there is a positive correlation.
PNHP has an extreme agenda. The group was formed to promote socialized medicine in the US. In addition, PNHP recognizes that its goal of equal access to health care is undermined if a private market for medical services is allowed to develop in parallel with the government run network (such a 2-tier system exists in the UK). Therefore, PNHP wants essentially to ban private medical practice. Himmelstein et al want to make it impossible for someone to pay to see a doctor.
The fact that Himmelstein is the principal author of the paper does not necessarily mean that the paper is wrong (although one should probably be more skeptical than usual). Even if the paper is substantially correct, we should keep in mind that Himmelstein's political agenda may interfere in a number of ways. For example, data that undermines his political agenda may have been suppressed or at least not released publicly. Also, he may spin, or allow others to spin, the paper's results in a way which is not justified by the data.
I think the latter concern is clearly at play right now, and primarily with respect to the rather widespread confusion about causality vs correlation. That is, when sticking to the science, the paper only makes a claim about there being a positive correlation between lack of insurance and mortality rates (1.4x higher mortality rates for the uninsured vs the insured population when adjusted for a variety of factors). But correlation is not causation. Although the uninsured have a higher mortality rate, it may be due to some factor other than the lack of insurance. This is important because it might be that even if these people were given insurance for free, their mortality rates would remain high. I suspect this to be the case, at least in part.
Although not specifically mentioned in the Himmelstein paper (a surprising and telling omission I think), a reasonable hypothesis is that there is self-selection involved among people who are uninsured. People who are responsible about their health, who care about their health, and who therefore will go to the doctor when they are sick and then stick to a prescribed course of treatment, those people are more likely to care enough to go out and make sure they have insurance. It is the lazy, irresponsible people who will be skewed towards being uninsured.
I think that this effect is real, even in a system where most people get insurance through their employer. Remember, most honest economists would agree that health insurance is paid for out of employee wages, not out of company profits. All other things being equal, jobs which do not provide health insurance will pay higher wages than jobs that do. People who do not value health insurance will choose those jobs that do not provide health insurance because they will earn commensurately higher wages.
The authors of the paper try to normalize for various factors, including income, education, ethnicity, and current health status. But they cannot control for personal responsibility. In fact, their attempt to normalize for health status might exacerbate the effect they have captured (i.e. it makes the correlation between lack of insurance and mortality rates higher) because people who are already sick are probably focusing more on getting health insurance than people who are healthy. In other words, those who have good health status and are short-sighted about their health are more likely to be uninsured. So those without insurance are probably in a healthier pool after controlling for income, education, and ethnicity.
[To be fair, I should mention that the authors think that the effect of controlling for health status can go the other way because those who have poor health status at the start of the study might have already suffered from lack of health insurance.]
In any case, the paper only claims correlation, not causation. The researchers did not have access to cause of death data, and, accordingly, there was no way to know if lack of insurance played any role at all in the excess death rate for the "normalized" pool of uninsured.
Perhaps by design, however, the authors of the paper have created a perception in the media that causation has been proved and that 45K deaths per year could be prevented if we extended health insurance coverage to every US resident. I think that if you cornered Himmelstein himself, he would back off of that claim very quickly.
This paper finds that there is actually little correlation between excess mortality for the uninsured when mortality is restricted to "amenable" causes of death. Additionally, it finds that there is no change in the relative mortality rates for the uninsured pool of people once they become eligible for Medicare coverage at age 65. That is, giving the uninsured insurance does not improve their survival rates relative to the insured, at least once they've reached age 65.
Of course, as I've expressed before, even if the lack of health insurance causes excess mortality rates, we have to judge that effect relative to other wealth or income based factors that cause excess mortality. Eating cheap, starchy food, living in crime-ridden neighborhoods, driving unsafe cars, and working in dangerous jobs all cause excess deaths among the poor and are clearly direct consequences of being poor. If the money required to give out free health insurance could get better results in these other areas, then we shouldn't waste our limited resources on universal health insurance.
The research has been interpreted as demonstrating that approximately 45K people die every year in the US because of lack of health insurance.
This is almost certainly wrong.
I note the following points to keep in mind about the paper:
1) the principal author is PNHP (Physicians for a National Health Plan) founder Dr. David Himmelstein;
2) in the paper itself the authors do not claim to have shown a causal relationship between lack of health insurance and higher mortality; they only claim to have shown that there is a positive correlation.
PNHP has an extreme agenda. The group was formed to promote socialized medicine in the US. In addition, PNHP recognizes that its goal of equal access to health care is undermined if a private market for medical services is allowed to develop in parallel with the government run network (such a 2-tier system exists in the UK). Therefore, PNHP wants essentially to ban private medical practice. Himmelstein et al want to make it impossible for someone to pay to see a doctor.
The fact that Himmelstein is the principal author of the paper does not necessarily mean that the paper is wrong (although one should probably be more skeptical than usual). Even if the paper is substantially correct, we should keep in mind that Himmelstein's political agenda may interfere in a number of ways. For example, data that undermines his political agenda may have been suppressed or at least not released publicly. Also, he may spin, or allow others to spin, the paper's results in a way which is not justified by the data.
I think the latter concern is clearly at play right now, and primarily with respect to the rather widespread confusion about causality vs correlation. That is, when sticking to the science, the paper only makes a claim about there being a positive correlation between lack of insurance and mortality rates (1.4x higher mortality rates for the uninsured vs the insured population when adjusted for a variety of factors). But correlation is not causation. Although the uninsured have a higher mortality rate, it may be due to some factor other than the lack of insurance. This is important because it might be that even if these people were given insurance for free, their mortality rates would remain high. I suspect this to be the case, at least in part.
Although not specifically mentioned in the Himmelstein paper (a surprising and telling omission I think), a reasonable hypothesis is that there is self-selection involved among people who are uninsured. People who are responsible about their health, who care about their health, and who therefore will go to the doctor when they are sick and then stick to a prescribed course of treatment, those people are more likely to care enough to go out and make sure they have insurance. It is the lazy, irresponsible people who will be skewed towards being uninsured.
I think that this effect is real, even in a system where most people get insurance through their employer. Remember, most honest economists would agree that health insurance is paid for out of employee wages, not out of company profits. All other things being equal, jobs which do not provide health insurance will pay higher wages than jobs that do. People who do not value health insurance will choose those jobs that do not provide health insurance because they will earn commensurately higher wages.
The authors of the paper try to normalize for various factors, including income, education, ethnicity, and current health status. But they cannot control for personal responsibility. In fact, their attempt to normalize for health status might exacerbate the effect they have captured (i.e. it makes the correlation between lack of insurance and mortality rates higher) because people who are already sick are probably focusing more on getting health insurance than people who are healthy. In other words, those who have good health status and are short-sighted about their health are more likely to be uninsured. So those without insurance are probably in a healthier pool after controlling for income, education, and ethnicity.
[To be fair, I should mention that the authors think that the effect of controlling for health status can go the other way because those who have poor health status at the start of the study might have already suffered from lack of health insurance.]
In any case, the paper only claims correlation, not causation. The researchers did not have access to cause of death data, and, accordingly, there was no way to know if lack of insurance played any role at all in the excess death rate for the "normalized" pool of uninsured.
Perhaps by design, however, the authors of the paper have created a perception in the media that causation has been proved and that 45K deaths per year could be prevented if we extended health insurance coverage to every US resident. I think that if you cornered Himmelstein himself, he would back off of that claim very quickly.
This paper finds that there is actually little correlation between excess mortality for the uninsured when mortality is restricted to "amenable" causes of death. Additionally, it finds that there is no change in the relative mortality rates for the uninsured pool of people once they become eligible for Medicare coverage at age 65. That is, giving the uninsured insurance does not improve their survival rates relative to the insured, at least once they've reached age 65.
Of course, as I've expressed before, even if the lack of health insurance causes excess mortality rates, we have to judge that effect relative to other wealth or income based factors that cause excess mortality. Eating cheap, starchy food, living in crime-ridden neighborhoods, driving unsafe cars, and working in dangerous jobs all cause excess deaths among the poor and are clearly direct consequences of being poor. If the money required to give out free health insurance could get better results in these other areas, then we shouldn't waste our limited resources on universal health insurance.
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