Monday, February 11, 2008

Our bizarre discourse on health care

In her campaign for the Democratic nomination, Clinton insists that her health care plan is "universal" where Obama's is not. It's often her biggest applause line -- sadly, the word alone is enough to work crowds into a frenzy, regardless of the policies underlying it.

After all, what makes Clinton's plan "universal"? Simple: she makes it illegal not to have health insurance.

There are, of course, valid reasons for supporting an individual mandate to purchase health insurance, and I'll delve into them later in this post. But I think it's critical to first stress how bizarre and tautological Clinton's "universality" taunt is. If the mere inclusion of a mandate is enough to make health insurance "universal," then it's easy to make almost anything universal: simply require everyone to purchase it.

Admittedly, Clinton's plan includes other provisions, including a vaguely defined subsidy regime that limits premium payments to a "percentage of income." But Obama's plan -- despite its similar lack of detail -- has all the same elements: subsidies, an optional government-administered plan, guaranteed eligibility, and a barrage of cost-savings measures. The only significant difference lies in Clinton's inclusion of a mandate.

Amusingly, in places where she's supposed to explain policy in greater detail, Clinton barely stresses the mandate. Her website's main page on health care, for instance, rhapsodizes about giving Americans "the same choice of health plan options that members of Congress receive," and "creating a new small-business tax credit" -- somehow failing to mention, anywhere, the one quality that Clinton believes gives her a crucial edge over Obama. The reason is obvious enough: the idea of forcing people to buy health insurance doesn't sound particularly attractive. Its only political value comes when it can be twisted into a claim of "universality."

And what about those subsidies -- which, in Clinton's opinion, should allow anyone to comply with the mandate? She provides only one detail: the subsidies will limit health payments to a "percentage of income." This is a horrible way to administer a subsidy regime.

Why? Say that the percentage is 10%. This is fine, obviously, for a family making $100,000 a year; $10,000 is a lot, but it's an affordable chunk of their income. It's probably still doable for a family making $40,000 a year. But for a household at poverty-level income -- say, around $10,000 a year? (7.7% of our population makes less than this, by the way.) It's still almost impossible: $1000 is an absolutely crippling total.

How can this possibly be enforced? Massachusetts, despite having an infinitely more sensible subsidy arrangement that eliminates premiums for those making less than the poverty level, still hasn't enrolled almost half the uninsured population. Clinton, almost always evasive and vague on the topic, has admitted that garnishing wages or collecting money through the tax system might be necessary. These are hardly the makings of a politically credible plan.

When the consequences are so uncertain and the means of enforcement so unclear, you'd think that supporters of a mandate would have extremely compelling reasons for their preferred policy. The usual argument is that today's uninsured population is a drain on the entire health care system -- that we're faced with a crowd of "free-riders," who should be compelled to get insurance rather than receive free emergency room care.

The main problem with this argument is empirical: uncompensated care simply doesn't comprise a big portion of nationwide health care expenditures. In fact, the best estimate I can see pins it at about 2.8% of total health care costs. This isn't a trivial fraction, to be sure, but it's hardly a compelling data point for the necessity of a mandate. Moreover, even without a mandate, it's likely that proactive policies could substantially reduce the 2.8% figure. Subsidies make coverage more affordable to the poor, remedying the main factor causing Americans to be uninsured. Prodding -- but not coercing -- uninsured young people to cover themselves will also make a substantial difference. (As a card-carrying "young person," I'm convinced that young people are mostly uninsured because they're apathetic about the concept, not because they have a deeply held desire to cheat the public health system. An opt-out employer-based system, or even just a government mailing of enrollment forms to uninsured young people, would work wonders.)

The other argument for the necessity of a mandate is adverse selection: the possibility that healthy people will broadly drop out of the system, pushing up premiums for those remaining. Theoretically, this holds the potential for a destructive cycle -- increased premiums will induce the next relatively healthy sliver of the population to go without coverage, raising premiums yet further, causing more to abandon their providers, and so on ad infinitum.

While this is a problem today, it's hardly the main flaw in our health system. Still, it's possible that the "guaranteed eligibity" provision in both candidates' plans would make this somewhat worse. Once insurance providers are legally barred from discriminating on the basis of preexisting health conditions, they will no longer be able to provide special, cheaper options for their healthiest customers. Those customers, in theory, will be more likely to drop out, leading to a much narrower risk pool.

Why am I not convinced by this case? Again, the empirical evidence is limited at best; it's unclear whether adverse selection will actually be significant enough to toss healthy Americans out of the system. And even if this does become a problem, mandates are decidedly not the best fix. Rather, we should increase the subisidy given to health care. If insurance costs only 50 cents on the dollar, any incentives driving healthy Americans away from purchasing coverage will rapidly diminish. Providing this subsidy in a clever "voucher" package will make it even more appealing. Just as behavioral economics tells us that consumers are far more likely to spend a "bonus" than a "rebate" (even if the two are functionally the same), it's psychologically much harder to waste a "voucher" than to ignore a "subsidy."

In fact, continuing "vouchers" to their logical conclusion, we can make a plan that is the functional equivalent of a mandate but lacks the unwieldy enforcement problems. Simply give everyone a voucher sufficient for basic health insurance, and finance the policy through an increase in tax rates. By changing the tax system appropriately, we can make this identical in financial terms to a mandate-subsidy regime. Higher marginal tax rates reflect the taxes implicit in means-tested subsidies -- if earning $1 more lowers your subsidy by 10 cents, you're effectively being taxed at a rate of 10% -- and no one is going to go without health insurance when a pile of money is available solely to purchase it. (If desired, we can even tighten this further by automatically enrolling anyone not using his voucher in a standard plan priced at the voucher amount.)

Yes, such a plan would require an increase in tax rates. But the money would have an clear and politically salient purpose: giving everyone the means to purchase health insurance. With sufficiently progressive changes in the tax base, it would redound to the financial benefit of the vast majority of Americans, making it an easier sell than a mandate.

Oddly, some observers seem to think the opposite: since the only basis for favoring a mandate over this kind of voucher scheme is political, they've apparently judged that partially funded mandates will be politically easier to implement. It's possible that they're right, although it's important to note that the same aversion to anything containing the word "tax" would have killed Social Security and Medicare. But even so, at this stage a mandate is an unproven and potentially reckless expansion of government coercion. Massachusetts, whose political and economic climate are particularly favorable to a mandate, still hasn't managed to get it right; until the policy has succeeded at the simpler state level, it's irresponsible to push it nationwide.

Frankly, I'm a little tired of writers who hail the mandate issue as a policy masterstroke for Clinton's team. At this point, Obama has the more reasonable and carefully considered position. Perhaps after every preferable option has been exhausted -- as I've mentioned, there are many -- and Massachusetts has managed to implement a functional mandate, we can consider a nationwide requirement to purchase health insurance. Until then, we have plenty of safer and better ideas to try.

Friday, February 01, 2008

Hillary's "command" of policy

As anyone who bothers to check my Facebook page (itself a model of aloofness and detachment) knows, I don't write often in this space. Tonight I'm making an exception, briefly jumping out of the shadows to bemoan the ineptitude of our political press.

I write after reading, for perhaps the thousandth time, that Hillary Clinton has an "unmatched" command of policy. Considering its complete lack of factual support, this is an astonishingly universal statement: it comes from supporters and detractors alike, all equally dedicated to a narrative that skirts serious analysis and trivializes the contest. While Clinton receives her fair share of criticism, it is never directed at her superficial, sound-byte understanding of public policy.

Yet this shallowness is in plain view, more evident than ever at tonight's debate. First, in an opening summary of her "differences" with Barack Obama, Clinton touched upon the subprime mortgage crisis:
Secondly, I think it's imperative that we approach this mortgage crisis with the seriousness that it is presenting. There are 95,000 homes in foreclosure in California right now. I want a moratorium on foreclosures for 90 days so we can try to work out keeping people in their homes instead of having them lose their homes, and I want to freeze interest rates for five years.
Clinton likes to portray herself as the competent manager, a knowledgeable and reliable choice who will be ready to take the job "on day one." A proposal to freeze adjustable mortgage interest rates for five years, however, is the product of a mind that is neither knowledgeable nor reliable. In fact, it's a rather frightful proposition, reminiscent of the clumsiest and most economically naive interventions in modern American history. At a time when financial markets are in turmoil, leading to an atmosphere of uncertainty that threatens the broader economy, we certainly cannot afford to entertain such a radical and disruptive jolt to the market.

Obama's response was refreshingly intelligent:
I have not signed on to the notion of an interest rates freeze, and the reason is not because we need to protect the banks. The problem is, is that if we have such a freeze, mortgage interest rates will go up across the board and you will have a lot of people who are currently trying to get mortgages who will actually have more of a difficult time.

So, some of the people that we want to protect could end up being hurt by such a plan.
Admittedly, this doesn't tackle the full complexity of the problem, but it gets the basic point right: the prospect of such unpredictable, top-down interference would be a severe chill to anyone planning to invest in mortgage-related securities. As the supply of funds for mortgages heads down, rates will inevitably increase, with millions of prospective homeowners facing the undesirable consequences.

Looking at Clinton's earlier discussion of the same issue, at the January 15th Las Vegas debate, her incoherence becomes even more pronounced:
We got here because, as I said on Wall Street on December 5th, a lot of our big financial institutions, you know, made these bets on these subprime mortgages. They helped to create this meltdown that is happening, that is costing millions of people who live in homes that are being foreclosed on or could be in the very near future because the interest rates are going up.

And what they did was to take all these subprime mortgages and conventional mortgages, bundle them up and sell them overseas to big investors. So, we’re getting the worst of both worlds.

We can’t figure out, under this administration, what we should do. I have a plan: a moratorium on foreclosures for 90 days, freezing interest rates for five years, which I think we should do immediately.

The administration is doing very little. And what we now see is our financial institutions having to go hat in hand to borrow money from these foreign funds. I’m very concerned about it.
So she's concerned that our leading financial institutions made such big bets on subprime mortgages... but advocates a policy that will surely lead them further toward the brink of insolvency, altering their returns in an unpredictable and potentially disastrous way? I can't even wrap my mind around it. Does she think that her policy will improve the picture for financial markets?

But somehow this doesn't prevent her coronation as the undisputed queen of policy. Apparently, "mastery" of the issues is achieved merely by reciting a plan, not by the actual content or real-world effect of that plan.

Compare this to Obama's unprecedented (in politics) economic clarity, best evinced by his New Hampshire rebuke to Bill Richardson over the effects of cap-and-trade:
GOV. RICHARDSON: It's -- can I answer? You know, I was Energy secretary. It's a bad idea because when you have a carbon tax, first of all, it's not a mandate. What you want is a mandate on polluters, on coal companies, on -- on -- on those that pollute to reduce greenhouse gas emissions by a certain target -- under my plan, 30 percent by the year 2020, 80 percent by the year 2040. It takes international leadership.

The better way to do it is through a cap-and-trade system, which is a mandate. Furthermore, a carbon tax, that's passed on to consumers. That's passed on to the average person. That's money you take out of the economy. So it's a bad idea. Cap-and-trade is mandate, but it's also going to take presidential leadership. It's going to take all of us here, every American, you know, to think more efficiently about how we transport ourself, what vehicles we purchase, appliances in our homes.


SEN. OBAMA: Well, I agree with Bill, that I think cap-and-trade system makes more sense. That's why I proposed it because you can be very specific in terms of how we're going to reduce the greenhouse gases by a particular level. Now what you have to do is you have to combine it with a hundred percent auction. In other words, every little bit of pollution that is sent up into the atmosphere that polluter is getting charged for it. Not only does that ensure that they don't game the system, but you're also generating billions of dollars that can be invested in solar and wind and biodiesel.

I do disagree with one thing, though, that Bill said, and that is that on a carbon tax the cost will be passed onto consumers and that won't happen with a cap-and-trade. Under a cap-and-trade there will be a cost. Plants are going to have to retrofit their equipment, and that's going to cost money, and they will pass it onto consumers. We have an obligation to use some of the money that we generate to shield low-income and fixed-income individuals from high electricity prices, but we're also going to have to ask the American people to change how they use energy. Everybody's going to have to change their light bulbs. Everybody's going to have to insulate their homes. And that will be a sacrifice, but it's a sacrifice that we can meet. Over the long term it will generate jobs and businesses and can drive our economy for many decades.
As it happens, I disagree with Obama: although the two policies are similar in many ways, a carbon tax has several distinct advantages over a cap-and-trade system. (That's an argument for another day!) But even this rather minimal display of economic literacy is enough to distinguish Obama from the rest of the field. After Bill Richardson -- whose utter ignorance, coming despite his past tenure as Secretary of Energy, demonstrates the meaninglessness of "experience" -- spouts the curious belief that a tax is "passed onto consumers" while the costs of a cap aren't, Obama gives us a politically unnecessary but substantively critical dose of reason.

And, finally, who can forget this classic exchange over increasing the cap on payroll taxes?
Obama: So I've been very specific about saying that we should not privatize, we should protect benefits. I don't think the best way to approach this is to raise the retirement age.

But what we can do is adjust the cap on the payroll tax. Right now, anybody who's making $97,000 or less, you pay payroll tax on 100 percent of your income. Warren Buffett, who made $46 million last year, pays on a fraction of one percent of his income.

And if we make that small adjustment, we can potentially close that gap, and we can make sure Social Security's there.


Clinton: I do not want to fix the problems of Social Security on the backs of middle-class families and seniors. If you lift the cap completely, that is a $1 trillion tax increase. I don't think we need to do that.


Blitzer: So, Senator, you're not ready to accept a raising of the cap on that? But I know that Senator Obama wants to respond to you.

Obama: I will be very brief on this because, Hillary, I have heard you say this is a trillion-dollar tax cut on the middle class by adjusting the cap. Understand that only 6 percent of Americans make more than $97,000 a year. So 6 percent is not the middle class.

It is the upper class. You know, this is the kind of thing that I would expect from Mitt Romney or Rudy Giuliani, where we start playing with numbers. We start playing with numbers in order to try to make a point.

And we can't do that. No, no, no. This is too important -- this is too important for us to pretend that we are using numbers like a trillion dollar tax cut instead of responsibly dealing with the problem that Judy asked for, and she said she wants a specific answer. And she said she wants a specific answer and that's what I provided. But understand that this is the top 6 percent, and that is not the middle class.

Clinton: First of all -- first of all, I think that you meant a tax increase, because that's what it would be.

But, secondly, it is absolutely the case that there are people who would find that burdensome. I represent firefighters. I represent school supervisors. I'm not talking -- and, you know, it's different parts of the country. So you have to look at this across the board and the numbers are staggering.
Putting aside Obama's accidental verbal miscue -- saying "tax cut" rather than "tax increase" -- this is a devastating indictment of Clinton. Very few Americans make over $96,000 a year, and hardly any of them are "firefighters." When confronted with a legitimate debate about how to protect Social Security, Clinton slid into a vacuous recitation of Republican talking points.

Hillary Clinton's supposed expertise on matters of policy is a charade. It succeeds because the media lacks the intelligence and willpower to offer anything beyond the most superficial interpretation of the candidates' positions. Reporters don't hail Clinton as a policy virtuoso because they understand the issues at hand; instead, they blindly reach for the easiest available storyline, the crude morality play of inspiration versus competence.

Obama may manage a victory this Tuesday, and if so there will be plenty to credit: his remarkable political talent, his recent flurry of endorsements, and a groundswell of youthful support. But whatever direction the nomination battle swings, we cannot ignore the media's appalling role in this contest. Presented with two laughably flawed justifications for Clinton's candidacy -- "experience" and aptitude for policy -- the press corps ceded its territory immediately, reverting to a tired and pedestrian tradition of horse-race analysis.

I'm hoping for better.

I'm not holding my breath.