Externalities, Health Care, and Socialization

Jonathan Catalan has a very thought-provoking post up on socialization of various degrees in health care, which he connects to the idea of externalities. I think there's some to agree with and some to disagree with here.

1. The current state of health care: Jonathan makes two claims about the nature of health care in the United States. First, he says that consumers face fixed low costs becasue of government subsidization, which leads them to demand more health care than is optimal. I agree this is true to a certain extent - the most important subsidization is the government's tax treatment of employer provider benefits, which are not taxed in the same way that income is. Since we have a progressive tax structure, higher-wage workers get a larger subsidy through the tax system for their health insurance than lower-wage workers. The second form of subsidization is Medicaid, which provides subsidized insurance to the poor. I'm not sure how easy it is to over consume medical care on Medicaid, but they obviously consume more than they would be able to with their own purchasing power. Those two subsidies are important, and I've come out against this special tax treatment for employer benefits in the past for the reasons Jonathan is outlining (I haven't come out against Medicaid for humanitarian reasons and because I have a hard time believing Medicaid is driving our medical cost inflation).

The second thing Jonathan says about the state of health care is more complicated. He writes: "The root of our current medical problem lies in the collectivization of the consequences of an individual’s irresponsible choices. The issue is that the costs of one person’s decisions are spread equally amongst society, to the point where that individual hardly feels the penalties of his value judgments — short of illness and death." I have more of a problem with this claim, at least in its current form. We have another word for the collectivization of the consequences of an individual's responsibility: "insurance". Collectivization in this case is usually considered to be a good thing because medical costs can be so discrete and unexpected - so good, in fact, that (before they were forced to buy it), four-fifths of Americans willingly paid monthly premiums for the service of collectivization of consequences, which was provided by private firms. I want to be careful not to get to the point where collectivization is equated with involuntary behavior of health insurance itself is considered the problem.

But I'm not even sure Jonathan is talking about the same thing I am here. He goes on to write: "The erosion of responsibility, operating with the understanding that the consequences of poor decisions will be mitigated by what is benignly called a “social safety net”, is where the viability of socialized medicine falls apart." What social safety net is he talking about here? Medicaid? But that affects only a small portion of the population. I'm not exactly sure what Jonathan is talking about. The most important, biggest, collectivization of consequences in health care is health insurance. But that's not a "social safety net".

2. The market and externalities: Jonathan then connects the current collectivization of consequences to externalities ("while the system is artificially maintained, the consequences — including corroding standards of living — must be borne by society as a whole"). So this is a little confusing to me - what is the artificial maintenance and what are these consequences? I guess I'll assume he means that the "artificial maintenance" is the tax treatment of employer benefits, and now the insurance mandate. It's clear how "society as a whole" bears some of the cost for that - since society is subsidizing the insurance through the tax system. How does "society as a whole" bear the costs of the mandate, though? That's less clear and Jonathan doesn't explain. I would have thought that only the portion of people who did not want insurance and were forced to buy it would bear the costs above their reservation price for that insurance. I suppose the rest of society would bear the costs through higher premiums (although this is tricky too - premiums for a specific class of insurance are projected to be lower). This was a bit more difficult to swallow: "The only solution is that which is provided by the free market, where the consequences of one individual’s actions are internalized less [sic] he provoke some form of reaction by another individual." Why is the market assumed to internalize costs? It's never explained. It's not that I disagree with the proposal - I've come out on this blog against the tax subsidy for employer benefits and against the mandate. We may have lingering disagreements over Medicaid, but those would not be disagreements over the economics of the program. I'm not aware of major externalities in the health care market - I think the biggest problems are information problems, not externality problems. I guess I just feel uneasy that Jonathan associates markets with internalized costs. That's a blatantly misleading association (although it's probably OK in this specific case)*.

3. Externalities and the government. In the next section, Jonathan makes a leap from health care to socialism and provides what I think is a very interesting analysis of the externalities of socialism. Usually when we think about the economic consequences of socialism, we don't think in terms of marginal costs and marginal benefits. Why? Because there is no market exchange so there's no point in setting MC equal to MB! So you don't usually hear talk about externalities with respect to socialism because it's hard to talk about externalities without talking about marginal costs and benefits. Jonathan's point is essentially that under socialism all benefits and costs are externalized. It's just another way of saying that socialism has no rigorous way of optimizing outcomes. Is this strictly true? Probably not strictly. You still pay for things in socialist states, so a portion of the cost is internalized if for no other reason than inertia nad institutional practice. But without the market process, of course, there's no way to guarantee that goods are priced in the right way. I think this is all a very interesting way of talking about socialism.

Jonathan then jumps back from socialism to health care. This gets confusing again, primarily because I'm not exactly sure what Jonathan means by "socialization/collectivization" in health care. He's making reference to welfare programs again, too - which I think are a different question entirely. As I said above, I agree with him on the tax subsidy and the mandates, but I'm concerned he's acting as if "socialization of risk" is the same "socialization" as the involuntary socialization of socialism. That muddies the waters, I think - I don't think they're the same thing. Jonathan writes, for example: "This is because, given the axiom of purposeful human action, people will economize their use of a particular based on its price. For example, if the price of a short medical check is $35, it might lead to an individual abandoning certain reasons he may have to go if the price was $25." It seems to me, though, that the biggest thing reducing what you pay for a proceedure on the day that you get that proceedure is all the insurance premiums you've paid. That's socialization. That's collectivization. But it's voluntary socialization. I'm not sure if Jonathan is arguing that that's bad. I'm just concerned because some people have argued that that's bad. In the end, Jonathan frames it as a moral issue - is it worth it? - and I think that's the right way to frame it. I don't think there's any ethical justification for universal health care, subsidization of employer plans through the tax system, or mandates. I do think there's ethical justification for ample subsidies for low income families, as well as perhaps an unsubsidized public plan (why not?).

At the end, Jonathan introduces this very bad claim that markets internalize costs. They don't, necessarily - but when costs are internalized markets work very well. But there's no guarantee that costs will always be internalized, and Jonathan shouldn't talk as if there is such a guarantee. This, for example, is as bad as Mises's piece: "Only through the free market can individuals innovate and labor to internalize both benefits and costs, and therefore only through the free market can externalities be resolved." And while we're on untrue statements, this is also poorly reasoned: "To assume that a free market in healthcare would not provide demanded services to potential customers is to assume that the individuals who compose this market operate irrationally."

So I think the discussion of socialism here is excellent. The discussion of health care is good, but it's vagueness made it hard to evaluate in detail - if he's talking about subsidization and mandates alone, I would agree - if he's talking about collectivization in health care in general, I think he's slightly off-base.

*In this section, Jonathan cites Mises on externalities. I wrote about this piece by Mises extensively here, and I encourage people to go back and read it. The sections Jonathan quotes about property are fine, but the rest of the piece was quite bad, in my opinion.

Good Historical Precedent for the Mandate

I've had a couple of posts up recently on misuses of American history to justify political or ideological positions today. The other day I wrote specifically about a liberal abuse of history that attempted to justify the health insurance mandate (which readers know I have major reservations about, despite my strong support for other elements of health reform). This morning, I noticed that Brad DeLong links to Paul O'Rourke's much, much better example of historical precedent for an insurance mandate (DeLong was also the source of the less convincing example I critiqued earlier). The legislation in question comes from the early Republic - the Act for the Relief of Sick and Disabled Seamen, of July 1798 (the Adams administration). The act laid a tax on all privately employed sailors, collected by their employers, of 20 cents a month (a lump sum payroll tax, essentially) to provide hospital care for the sailors. O'Rourke provides the full text of the law. Of course there are some differences - there is still no "mandate" per se (then again, there was nothing to mandate, as there was no health insurance at the time) - but the more fundamental point is the tax imposed on all sailors, whether they want the hospital care or not. This is the same mechanism that is being used to implement the mandate today.

I don't think this answers all the Constitutional questions. After all, I actually went in to the text of the Constitution to debunk the last attempt to justify the mandate, which I don't do here. I would think this one would be justified with the Article 1, Section 8 power to lay taxes and appropriate funds for the general welfare. One argument I could make is that this is really more of an example of a public option than it is a mandate (after all, no one is forced to purchase anything, they are simply taxed and provided a social service - just like Medicare). I think that's a valid argument to make about how far we should take this historical precedent. Nevertheless, I still think it is important to acknowledge, because this example is a lot sturdier constitutionally and as an analog to the current situation than the last one shared by DeLong about the militias.

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Some people talk as if the Constitution were just the Articles of Confederation with lower voting thresholds. All significant additional powers granted to the federal government are downplayed. We spin this story that the commerce clause and "necessary and proper" and the General Welfare clause are inventions of FDR in the 1930s, or at the very earliest perhaps Progressives and trustbusters a few decades earlier. This simply wasn't the case. The Constitution is not another Articles of Confederation and we need to take that seriously.

Misuses of American History and the Mandate

I've been frustrated recently with abuses of American history in pursuit of ideological ends, a topic I've opined on even more extensively in other fora. It frustrates me for two primary reasons: first, it's often just very bad history. As someone that spends a lot of my free time reading history, that's bothersome. But perhaps more importantly, it's very conceited to speak as if you own America's history and everyone else has abandoned it. America's tradition of liberty and self-government is a very broad tradition. It's perfectly legitimate for all sorts of people to find inspiration from that tradition: tea partiers, libertarians, liberals, conservatives, etc. What I think is illegitimate is for a select group to claim that they are the sole inheritors of the legacy of the founders and that the others are illegitimate.

Needless to say, the Tea Party movement has given me a lot of ammunition lately. Their abuse of history has been by far the most conspicuous, and they use it to buttress one of the most radical political positions on the market today. So when I stumbled across a liberal abuse of history in defense of a narrow legal position, I felt an obligation to share it, simply because I've been pointing to the Tea Partiers so insistently.

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Ian Millhiser at Think Progress argues that there is precedent for the individual health insurance mandate. Virginia Attorney General Cuccinelli, and others, have argued that the Constitution gives the Congress no authority to force people to buy a good or service. In his rebuttal, Millhiser points to the Second Militia Act of 1792 (HT - Brad DeLong), passed during the Washington administration. This act required able bodied men to purchase all manner of equipment so they could defend the country if called upon. Washington requires people to buy guns; Obama requires people to buy health insurance - what's the problem?

The problem comes in when you dig a little deeper into what gave Washington the authority to demand those purchases. The first place to look - the first place you should always look - is Article 1, Section 8 of the Constitution, which lists the powers of Congress. Other powers of the government come up in other places, but this is the mother lode. Several relevant military powers are included, but for brevity I'll note the most important for this case:

"To provide for organizing, arming, and disciplining the Militia, and for governing such part of them as may be employed in the service of the United States"

There are also various powers for making rules governing land and naval forces, which can also be mentioned. The point is, our most important question today is "what gives the federal government the right to force us to buy health insurance". A historic example of a legitimate past forced purchase may indeed be enlightening, but only if the legitimacy of that past legislation is derived from a power that can also be applied to health insurance (i.e. - a general power to mandate purchase of goods or services). That's not the case here. Nobody has pointed to such power, they've simply pointed to the Second Militia Act. And I would contend that the Second Militia Act is derived from the authority of Congress to govern and regulate the militia. Governance of the militia means telling members of the militia (able bodied males) what is incumbent upon them as militiamen, such as staying well equipped. This power is perfectly legitimate, but I don't see how it carries over to health insurance at all. It's a misuse of history.

I personally think of myself as a Constitutional originalist. I do think it's a meaningful document that needs to constrain government today. I don't think we can just invent new rights a la FDR. Nevertheless, I take issue with a lot of other people who also call themselves "originalist", because I think that these "originalists" discount the extent to which the Constitution gives discretion to future generations and future Congresses for their own self-government. For example, Congress has the explicit authority to appropriate money to provide for the General Welfare. That power is vague. It is "elastic". It is entirely constitutional. Many "originalists" get frustrated with the application of this power, but I don't understand why. If the Congress had intended "General Welfare" to mean anything other than "General Welfare" they wouldn't have written it that way. We need to be judicious and deliberative about exactly what a wise appropriation for the General Welfare might be - but that is a question for public and Congressional debate, not a question for constitutional lawyers. The power is very clear. So I'm an originalist, but I'm an originalist that reads a great deal of deliberate inclusion of discretion into the text of the Constitution. I simply don't see any other way of reading the document.

No reading of the Constitution, in my mind, provides a general authority to mandate the purchase of goods and services. Certain powers - such as the militia powers - give some scope for such mandates. But I find no power that could justify the health insurance mandate.

Health Reform and Premiums

The Congressional Budget Office (CBO) recently released estimates for the Senate health bill, and what they've said about premiums has caused some argument among the experts. And by "argument", I mean they take entirely opposite views on what direction the CBO suggests premiums are moving in. Gruber, Krugman, and Yglesias all contend that premiums will actually go down. The CBO report itself seems to say in several places that premiums will go up. What's going on? Gruber, Krugman, and Yglesias's claim should sound strange to people. The Senate bill is sort of like Massachusetts health reform writ large, and we didn't see premiums decline there.

I think Megan McArdle is largely on target in her explanation of what's going on, and she is firm but fair with the dissenters. Basically, if you look at the same type of plan before and after reform the premiums are reduced - that's what Krugman and Gruber are emphasizing. That means something for sure, but there's a reason why the CBO didn't highlight that. If people were free to choose what health insurance they wanted, it would be meaningful to have the same plan have lower premiums as a result of reform.

The problem is, they aren't free to choose (to borrow a Milton Friedman line). A slew of mandates are included in reform, not the least of which being the mandate to simply have insurance. So risk pools are wider, which does provide the opportunity to furnish the same insurance for less money. But if you're not allowed to buy the same insurance, what does that matter? If everyone had the same options available to them that they did before the reform, I would say look at how the premium of different types of plans change before and after reform. But they don't have the same options - they are forced to buy more. So looking at the change in the same plan is meaningless - instead you have to look at the change in the premiums people will actually end up paying.

And that is supposed to increase. And we shouldn't be surprised - as I've said for a while now, the mandate dumps tens of millions of people into the insurance market. You can't have a demand shock like that and reasonably expect a drop in prices. It just doesn't pass the smell test. Does this mean it's a bad bill? Well it's at the top of the list of arguments you would make for why it's a bad bill. I think your ultimate position on the bill itself is going to have to be based on more than that. The bill does a lot of other things that I think are good. The mandate, in my mind, is a very bad idea. But if premiums continue to climb the mandate can always be adjusted later. The question for people (who feel the way I do on the mandate) is - are all the Medicare reforms, all the advances in tax policy, all the expansions of Medicaid, the exchange, etc. still better than the status quo even if they're burdened with an odious mandate? That's a question that people have to answer for themselves. I think on balance we need to do something, and I'd prefer we didn't jump into an expansive public option. This seems like the best way to do that. The problems associated with the mandate seem smaller to me than the problems associated with doing nothing. But reasonable minds may disagree.

Reform and Recovery - A Word of Caution from Keynes

From John Maynard Keynes's Open Letter to President Roosevelt

"You are engaged on a double task, Recovery and Reform;--recovery from the slump and the passage of those business and social reforms which are long overdue. For the first, speed and quick results are essential. The second may be urgent too; but haste will be injurious, and wisdom of long-range purpose is more necessary than immediate achievement. It will be through raising high the prestige of your administration by success in short-range Recovery, that you will have the driving force to accomplish long-range Reform. On the other hand, even wise and necessary Reform may, in some respects, impede and complicate Recovery. For it will upset the confidence of the business world and weaken their existing motives to action, before you have had time to put other motives in their place. It may over-task your bureaucratic machine, which the traditional individualism of the United States and the old "spoils system" have left none too strong. And it will confuse the thought and aim of yourself and your administration by giving you too much to think about all at once."

Health Reform and the Reconciliation Process

Washington was buzzing Friday with news that health care reform would likely be pushed through the Senate this Fall during the reconciliation process, making it immune to the risk of filibuster. Normally, the famously "collegial" Senate has sensibilities that are far too delicate to countenance interrupting a given Senator when he or she is speaking. To close debate on a bill, 60 out of 100 Senators must vote for cloture. The end result of this procedural rule is that any given bill actually needs 60 votes to pass, not 51, so long as some Senator cares enough to filibuster it*. Filibustering is good insofar as it requires Senators to produce a more bipartisan bill. However, it opens the possibility that the minority will be able to dictate to the majority in a variety of occasions. The House does not have this rule.

However, budget bills can be submitted as "reconciliation bills", which cannot be filibustered. A reconciliation budget will specify certain legislative committees that need to bring certain pieces of legislation into alignment with the budget bill. So for example, this year's budget bill may say "we will spend X amount of money on health care", and specify that the committee that deals with health care bring the law in line with the spending requirements. These changes in health care law will then be passed without the risk of filibuster as well. This means that health care reform may be passed this year with 51 votes (which the Democrats easily have), rather than 60 (which they can't count on). It may come as a surprise to most Americans that this is even a major piece of news - isn't the majority always supposed to rule? Yes... except in the United States Senate.

Republicans are predictably suggesting that this is heavy handed and inappropriate. Why is this response predictable? Because it's exactly how the Democrats responded when the Republicans used the reconciliation process to push through the Bush tax cuts.... and most of Clinton's budgets... and most of Reagan's budgets. The false outrage over the reconciliation process is old hat in Washington. I personally have no problem with the Democrats using the reconciliation process - I wouldn't mind seeing filibusters eliminated from the Senate entirely. They have some moderating benefits, but they are inherently undemocratic. Republicans shouldn't be ashamed for using them to pass tax cuts under Bush, and they shouldn't be outraged that Democrats are using them now. But let's get past all this... why do I start by quoting a note of caution that Keynes offered to Roosevelt in the 1930s?

Reform and Recovery

The reconciliation process essentially guarantees that we will see some sort of health care reform this year. It may be a monumental overhaul, or it may be a first step towards a monumental overhaul. Right now we don't know. Health care reform is desperately needed in this country, no matter what side of the aisle you're on. We pay far more for the care we receive than any other country, and tens of millions of Americans don't have any health insurance. Higher costs and lower coverage are an explosive combination. These rising health care costs are also a burden on U.S. businesses who provide most of the coverage in the U.S.. Whatever the failings of the health care systems of our peer nations, they have been more successful at keeping costs down, which means that their businesses can operate that much more efficiently than ours can. Health care reform is unambiguously an imperative right now.

But another imperative is recovery from the current recession. Despite the upbeat talk of President Obama and Fed Chair Bernanke recently, most analysts think that we have not bottomed out yet, and when we do the recovery will be drawn out, rather than rapid. The ubiquitous Depression analogies aren't made to scare people, but they are made for a reason - this downturn will end up being substantial, and like the Depression there is no real prospect that the recovery will be swift. Those who write off double digit unemployment are fooling themselves. The "real economy" hasn't even bottomed out yet, and unemployment won't stop rising until well after the "real economy" has reached it's trough and started climbing again for at least a couple quarters.

Many people see the problem as steering deftly between the Scylla of a broken health care system and the Charybdis of a once (more likely twice) in a lifetime economic downturn. I think this understanding of the situation is incorrect. Health care is obviously a problem in this country - but is it a problem that throws millions out of work in a matter of months? Is it a problem that destroys a third of a family's savings? Is it a problem that will grow exponentially worse if it is allowed to fester for another year or two or three? No. If we are still at the bottom of this hole in 2011 or 2012, history will remember this as the Second Great Depression, and the future prospects of capitalism will truly be in jeopardy. If we maintain the current health care system through 2011 or 2012, how will history remember us? Perhaps as lazy. Perhaps that we missed an opportunity. Perhaps even that we are uncaring and primitive. It will probably look at us the same way that we look back to the sluggish adoption of Social Security and unemployment insurance in this country; unnecessarily slow, but since the change was inevitable, the delay is ultimately just remembered as an artifact of history. We have had somewhere around 40 to 50 million uninsured for years. It is a burden and it is a crisis, but that crisis clearly lacks the immediacy or urgency of the economic crisis.

We did elect Obama for a double task: reform and recovery. But his mandate for reform and recovery doesn't mean that both need to be done within ten months of taking office.

What is to be done?

I, like the vast majority of Americans, am suspicious of what's called a "single payer", public health insurance system. Thankfully, Barack Obama and the United States Congress also seem to be wary of such a course. We know that the market is too efficient to completely abandon. But there are problems that public policy can help to address. While Americans shouldn't be required to purchase government health care, we can think about making some sort of subsidized public insurance available to the 50 million people who are uninsured. The externalities of public health may justify mandating health insurance coverage, either from a public or private source - much like many states already do with car insurance. We can think about eliminating the tax privileges currently afforded to employer provided health benefits, which encourage sub-optimal over-consumption of health care and hide the true costs of care. We can imagine the benefits of a system of electronic health records, and we can conceive a potential role for government in jump-starting this process. There is a lot we can potentially do, but there are no silver bullets. I think this suggests that we act, but also that we discuss and deliberate. The "experts" have discussed our options for years - at least since the aborted attempt at health care reform spearheaded by the current Secretary of State in 1993. But our elected representatives have not had a real debate on the finer points of health reform, probably since that debate on the Clinton plan fifteen years ago.

If we don't act immediately to address the economic crisis, we could easily slip into a cycle of deflation, rising debt burdens, rising unemployment, and further deflation. A moment of hesitation could make this recession much worse. Can we say the same for health reform? Of course not? A moment's hesitation - even a year's hesitation, or two year's hesitation will probably find us about where we are today: with a health care system that could be vastly improved on a number of measures, but that generally keeps Americans healthy. What would a rush to reform health care risk? It risks leaving us with an equally poorly conceived system that we're likely to be stuck with for years or even decades to come.

I will note, this is not meant to suggest that there is no risk associated with rushing a program of economic recovery. Hindsight will certainly show us that there were major problems with TARP, TALF, ARRA, and every other "rescue" that's been rolled out since the summer of 2008. We will pay a price for these problems. But I would argue that these problems are far outweighed by the problems that would have emerged if we had waited longer to do something. I think the risks are flipped when it comes to reforms in general, and health care reforms in particular. Prudence and careful consideration will pay off. Obama should not rush into this (nor should he rush into education reform, finance regulatory reform, etc. etc.).

*The Washington buzz of Tuesday, the 28th (which absolutely swamps the events of last Friday in overal buzziness) largely negates the buzz on reconciliation of Friday, the 24th. Republican Senator Arlen Specter announced that he is changing his affiliation to Democratic, virtually assuring that by the Fall (when Al Franken will in all likelihood be seated), the Democrats will have a filibuster-proof majority anyway.