"Go-kart sittin' in the shade: you don't need a ticket to ride, it's summertime, summertime, slip down a water slide. Little kid dancin' in the grass, legs like a rubber band. It's summertime, summertime. There's a line at the candy stand."
Paul Simon, Beautiful
Friday, June 30, 2006
Thursday, June 22, 2006
Two Small Points of Light
I met a free-lance writer last weekend, the wife of one of our friends from graduate school. I started talking about public policy issues, as I do obsessively these days, and she asked my political leanings. I replied that it’s a two-party system, so I’m a Democrat by default these days, as the Republicans have all the power and are completely unchecked in abusing it.
Then I came home and looked at my blog and laughed. Look at how extreme I am! One can’t be a centrist anymore. After all somebody—not Dante—said, “The hottest fires in hell are reserved for those who remain neutral in times of moral crisis.” (“I don’t know; I’m just saying it’s not Dante.” Why yes, I did see 'The Lieutenant of Inishmore' last weekend.)
It used to be that JSM was far left of me on the political spectrum, so it stopped me short last night to hear him call the American Antitrust Institute the most reliable of the left-of-center antitrust advocacy organizations, with only the occasional left-wingnut. JSM hasn’t moved position. I’m the one who has swung around him.
JSM once told me about a frequent dream he used to have as a child, where he flew around his neighborhood. It seemed so real, he decided to test it to see if he was really flying around his neighborhood. The next time he had the dream, he looked carefully at the wall in the neighbor’s garage, memorizing the tools so he could check them when he awoke. But when he woke up, he realized that it was all wrong: his house was reversed, rooms were missing, and distances were off.
I feel like I’m living in a dream world, and only occasionally looking at specifics that remind me that the entire perception is slightly off. It’s not a bad representation of reality. It could fool you when you’re not thinking critically. But people are by nature biased, and view the world through the lens of those biases. They are also oppositional by nature, moving further afield in response to “the other” group. Unfortunately, the biased dream world doesn’t yield an accurate map for public policies. This is why centrist policy tends to be the best policy. It forces the biased sides to integrate their views and find the common ground—which is much more likely to be the actual ground.
The American Antitrust Institute mission is posted on their website:
“Our mission is to increase the role of competition, assure that competition works in the interests of consumers, and challenge abuses of concentrated economic power in the American and world economy. We are, broadly, post-Chicago centrists dedicated to the vigorous use of antitrust as a vital component of national and international competition policy.”
Yesterday the American Antitrust Institute held their annual conference, and gave their Antitrust Achievement Award to two senators, Senator Mike DeWine (R-OH) and Senator Herb Kohl (D-WI). The senators have a long history of working together on the Antitrust, Competition Policy, and Consumer Rights subcommittee to enforce appropriate antitrust policy. I don’t agree with many of their votes in other areas, but if the AAI wants to recognize them for cross-party efforts to implement vigorous antitrust policy, I will lift my glass and say, “Here’s to the future.”
Then I came home and looked at my blog and laughed. Look at how extreme I am! One can’t be a centrist anymore. After all somebody—not Dante—said, “The hottest fires in hell are reserved for those who remain neutral in times of moral crisis.” (“I don’t know; I’m just saying it’s not Dante.” Why yes, I did see 'The Lieutenant of Inishmore' last weekend.)
It used to be that JSM was far left of me on the political spectrum, so it stopped me short last night to hear him call the American Antitrust Institute the most reliable of the left-of-center antitrust advocacy organizations, with only the occasional left-wingnut. JSM hasn’t moved position. I’m the one who has swung around him.
JSM once told me about a frequent dream he used to have as a child, where he flew around his neighborhood. It seemed so real, he decided to test it to see if he was really flying around his neighborhood. The next time he had the dream, he looked carefully at the wall in the neighbor’s garage, memorizing the tools so he could check them when he awoke. But when he woke up, he realized that it was all wrong: his house was reversed, rooms were missing, and distances were off.
I feel like I’m living in a dream world, and only occasionally looking at specifics that remind me that the entire perception is slightly off. It’s not a bad representation of reality. It could fool you when you’re not thinking critically. But people are by nature biased, and view the world through the lens of those biases. They are also oppositional by nature, moving further afield in response to “the other” group. Unfortunately, the biased dream world doesn’t yield an accurate map for public policies. This is why centrist policy tends to be the best policy. It forces the biased sides to integrate their views and find the common ground—which is much more likely to be the actual ground.
The American Antitrust Institute mission is posted on their website:
“Our mission is to increase the role of competition, assure that competition works in the interests of consumers, and challenge abuses of concentrated economic power in the American and world economy. We are, broadly, post-Chicago centrists dedicated to the vigorous use of antitrust as a vital component of national and international competition policy.”
Yesterday the American Antitrust Institute held their annual conference, and gave their Antitrust Achievement Award to two senators, Senator Mike DeWine (R-OH) and Senator Herb Kohl (D-WI). The senators have a long history of working together on the Antitrust, Competition Policy, and Consumer Rights subcommittee to enforce appropriate antitrust policy. I don’t agree with many of their votes in other areas, but if the AAI wants to recognize them for cross-party efforts to implement vigorous antitrust policy, I will lift my glass and say, “Here’s to the future.”
Wednesday, June 21, 2006
Class Warfare and Country Music
I know I said I don’t listen to country music anymore, not since I heard the Gretchen Wilson song, “Politically Uncorrect.” Check out the lyrics to the song, which I hope is the high-water mark of right-wing musical propaganda. The song reinforces the Republican self-image as the hard-working underdog and by extension the view of the Democrats as freeloading welfare hags and overeducated politically-correct atheist liberal flag-burners. This is nauseatingly absurd, because dated Republican economic ideology and policy are combining with the forces of globalization to create a more economically divided country, the haves and the have-nots, with decreasing economic mobility. Their policies are actually reinforcing the divide between the educated elite and the working-class poor, and the working-class poor are cheering.
Welfare welfare welfare government handouts handouts handouts. That’s the record that has been playing for thirty years. Economists have moved on. It’s time to move party ideology on.
But I digress. I didn’t actually replace the local country station on my car radio presets. I flip between channels when commercials come on, so sometimes I end up listening to the country station before my disgust cues me to change the channel. Which is how I happened to be listening to the country station morning show the week after Stephen Colbert bombed at the White House Correspondents’ Dinner. Two nights previously, as a tribute, The Daily Show had featured a “Classic Colbert” bit in which Stephen Colbert attended the Connecticut School of Broadcasting. Back at the country morning show, I was only half-listening to the banter, which ended in some joke about the Columbia School of Broadcasting, when the lesser DJ added, “No, the Connecticut School of Broadcasting.” That got my attention. It was a secret handshake, a code word which only Daily Show viewers understood. A small cry for solidarity in this crazy, mixed-up world.
So you see, I couldn’t get rid of my preset at that point. They needed me, those poor DJs who couldn’t get a job at a pop station. Which is completely understandable. I like the morning DJs at the pop station better, too.
All of which explains how I happened to be listening to the country station this afternoon when they played [drum roll, please] a Dixie Chicks song. An old one, “Ready to Run,” off their second album. All casual like, no fanfare, just an ordinary song credit, as if the world had never tilted into bizarro-land. They just slipped it in there, so as not to ruffle any feathers on people who aren’t paying attention.
I like my local country radio station. I may be just over the border in Jesusland, but they straddle the demilitarized zone. I can’t tell if they are circumspectly avoiding land mines on either side, or carefully packaging the true Voice of America as part of the resistance.
Just for the record, I have no idea how they treated The Incident. I was living in France at the time, occasionally listening to a country radio station from Texas over the Internet. Now that was truly bizarro.
Welfare welfare welfare government handouts handouts handouts. That’s the record that has been playing for thirty years. Economists have moved on. It’s time to move party ideology on.
But I digress. I didn’t actually replace the local country station on my car radio presets. I flip between channels when commercials come on, so sometimes I end up listening to the country station before my disgust cues me to change the channel. Which is how I happened to be listening to the country station morning show the week after Stephen Colbert bombed at the White House Correspondents’ Dinner. Two nights previously, as a tribute, The Daily Show had featured a “Classic Colbert” bit in which Stephen Colbert attended the Connecticut School of Broadcasting. Back at the country morning show, I was only half-listening to the banter, which ended in some joke about the Columbia School of Broadcasting, when the lesser DJ added, “No, the Connecticut School of Broadcasting.” That got my attention. It was a secret handshake, a code word which only Daily Show viewers understood. A small cry for solidarity in this crazy, mixed-up world.
So you see, I couldn’t get rid of my preset at that point. They needed me, those poor DJs who couldn’t get a job at a pop station. Which is completely understandable. I like the morning DJs at the pop station better, too.
All of which explains how I happened to be listening to the country station this afternoon when they played [drum roll, please] a Dixie Chicks song. An old one, “Ready to Run,” off their second album. All casual like, no fanfare, just an ordinary song credit, as if the world had never tilted into bizarro-land. They just slipped it in there, so as not to ruffle any feathers on people who aren’t paying attention.
I like my local country radio station. I may be just over the border in Jesusland, but they straddle the demilitarized zone. I can’t tell if they are circumspectly avoiding land mines on either side, or carefully packaging the true Voice of America as part of the resistance.
Just for the record, I have no idea how they treated The Incident. I was living in France at the time, occasionally listening to a country radio station from Texas over the Internet. Now that was truly bizarro.
Thursday, June 08, 2006
"Starve the Beast" is a Bankrupt Idea
Jonathan Rauch of the Brookings Institute has an interesting comment on the use of tax cuts to “starve the beast,” in the June 2006 issue of The Atlantic Monthly. He visits William Niskanen, chairman of the Cato Institute, a libertarian think-tank, for some numbers. Niskanen does a statistical regression of spending on taxes from 1981 to 2005, controlling for unemployment, and shows that tax cuts actually “stoke the beast.”
“A tax cut of 1% of GDP increases the rate of spending growth by about 0.15 percent of GDP a year. A comparable tax hike reduces spending growth by the same amount.”
Niskanen found that the level of taxes that neither reduce nor grow spending is about 19% of GDP.
Niskanen has an interesting little story explaining this. If the government spends 25% more than it receives in taxes, this feels like a 20% discount to voters on the price of government. And as the law of demand says, when the price of something goes down, people purchase more of it.
That story leaves a bad taste in my mouth.
Okay, maybe that story went over well with you, the lay reader. But that little story has so many things wrong with it that no economist worth their salt can walk by without doing a double take. Since Niskanen went to the same school as I did, I’m going to give him the benefit of the doubt and assume that he didn’t want to overwhelm Rauch with a more accurate model. But really, he should be more careful, because a more accurate model better describes reality, and most of us here prefer to live in reality.
Here’s what’s wrong with the story: voters don’t choose government spending. Politicians choose government spending. Politicians choose tax cuts. Ordinary citizens can comment on that every two, four and six years. But they don’t choose government spending.
To make the story work, you must replace voters in the story with politicians. That’s right; the politicians who order the tax cuts are the ones who spend like it’s the last day of the 20%-off sale at Macy’s. And to make the story work, you must further assume that politicians are either so stupid that they don’t realize we are going to have to pay the money back, or so selfish that they don’t care. While I don’t dismiss the possibility of the former, I would lay my money on the latter. The objective of most politicians is to get re-elected, to keep playing this game, and that means cutting taxes as well as spending money on constituents back home even when it is contrary to their stated ideological goal of reducing the size of the government.
“Starve the Beast” is a bankrupt idea because it expects the same pandering politicians who cut taxes to also cut spending. It turns out you don’t even need to model the politicians’ objective functions, because it all comes down to common sense. Responsible governments pay for what they buy. Irresponsible governments put it on the grandkids’ credit card and toss a little extra in the cart for their friends.
“A tax cut of 1% of GDP increases the rate of spending growth by about 0.15 percent of GDP a year. A comparable tax hike reduces spending growth by the same amount.”
Niskanen found that the level of taxes that neither reduce nor grow spending is about 19% of GDP.
Niskanen has an interesting little story explaining this. If the government spends 25% more than it receives in taxes, this feels like a 20% discount to voters on the price of government. And as the law of demand says, when the price of something goes down, people purchase more of it.
That story leaves a bad taste in my mouth.
Okay, maybe that story went over well with you, the lay reader. But that little story has so many things wrong with it that no economist worth their salt can walk by without doing a double take. Since Niskanen went to the same school as I did, I’m going to give him the benefit of the doubt and assume that he didn’t want to overwhelm Rauch with a more accurate model. But really, he should be more careful, because a more accurate model better describes reality, and most of us here prefer to live in reality.
Here’s what’s wrong with the story: voters don’t choose government spending. Politicians choose government spending. Politicians choose tax cuts. Ordinary citizens can comment on that every two, four and six years. But they don’t choose government spending.
To make the story work, you must replace voters in the story with politicians. That’s right; the politicians who order the tax cuts are the ones who spend like it’s the last day of the 20%-off sale at Macy’s. And to make the story work, you must further assume that politicians are either so stupid that they don’t realize we are going to have to pay the money back, or so selfish that they don’t care. While I don’t dismiss the possibility of the former, I would lay my money on the latter. The objective of most politicians is to get re-elected, to keep playing this game, and that means cutting taxes as well as spending money on constituents back home even when it is contrary to their stated ideological goal of reducing the size of the government.
“Starve the Beast” is a bankrupt idea because it expects the same pandering politicians who cut taxes to also cut spending. It turns out you don’t even need to model the politicians’ objective functions, because it all comes down to common sense. Responsible governments pay for what they buy. Irresponsible governments put it on the grandkids’ credit card and toss a little extra in the cart for their friends.
Sunday, June 04, 2006
What's up with Those Three Red States?
The New York Times finally took notice of the three states in which Bush still has an approval rating at or above 50%: Utah (62% Mormon), Idaho (25% Mormon), and Wyoming (10% Mormon). [See Radical Russ’s Net Approval Map. Open it up in a new window, because we are going to look at it in more detail.]
The Times author, Timothy Egan, goes to Provo, Utah, (85% Mormon) to ask the locals why they are standing by their man. He gets some superficial answers, but doesn’t ask the right question. Egan gets closest in this paragraph:
“All of the administration's perceived failures, including the Iraq war, Hurricane Katrina and the budget deficit, go through a different filter in these Bush strongholds. Sounding a familiar theme, Mr. Craft said he was distrustful of news media portrayals of Mr. Bush because ‘they concentrate too much on the negative and certain small things.’”
The real question is why do the Mormons have a different filter? As a recovering Mormon and former Republican, I can tell you, but first we have to take a detour through some interesting psychology: cognitive biases.
It is an unfortunate failure of higher education that every college graduate does not know that all human beings have systematic biases in processing information. We know the other guy is definitely biased, but we think of ourselves as the paragon of fact-based objectivity. Yet psychologists have demonstrated a number of systematic cognitive biases that everybody shares, the relevant ones here being the confirmation and disconfirmation biases. As human beings, we appear hard-wired to search for and accept uncritically information that confirms our prior beliefs, and to discount and harshly criticize information that contradicts our prior beliefs. At the extreme we simply won’t listen to information that contradicts what we believe (and flip the channel over to Fox News).
For someone to change an opinion requires either a steady stream of contradictory information that eventually becomes too overwhelming to ignore, or a single big event that is so shocking it insists that one consider a new world view.
You can see this occur in the nation as a whole. From the day Bush took office, there has been a steady stream of negative information regarding the Bush administration’s job performance, but prior to the 2004 election nobody but registered Democrats was listening. After the 2004 election, this pile of information became a mountain, and more people started changing their mind. Then along came Katrina. Hurricane Katrina was the big event that shocked nearly everyone out of their belief that Bush was a great leader. But the changes in job approval didn’t occur overnight. Katrina opened everyone’s mind to the possibility that he was a lousy leader, and allowed them to give more credence to the continuing stream of bad news about the Bush administration. Look at the Net Approval map again, and click on the June 2005 through November 2005 maps. You’ll see that Katrina did not have a big impact in September on Bush’s net approval rating, but built up throughout October and November.
Did you notice something else? What’s up with those three red states? The numbers bounce around a bit, but stay pretty much as red by November 2005 as they were in June 2005. Approval ratings changed most in Wyoming, where there are the fewest Mormons. Katrina did not touch the Mormons’ opinions!
So what is different about Mormons’ world view that Hurricane Katrina did not create any cognitive dissonance regarding Bush’s leadership skills?
Mormons do not believe the federal government was negligent in its response to Hurricane Katrina. They believe the Constitution was inspired in order to allow the true church of Christ to be restored to the earth in the United States, but they have a strong historical lore full of stories of government persecution, so they want nothing more than to keep the government out of their lives. (Except regarding abortion and gay marriage.) Like western settlers in general, they are self-reliant; like religious conservatives they believe the church should be a mutual aid society – on steroids. The Mormons have a church welfare system unrivaled by any other church, and church doctrine insists that members should rely on the church before the government. They take care of themselves, and they do a damn good job.
That Louisiana was not prepared to take care of itself was tragic, but from the Mormon point of view, that doesn’t mean the federal government was lax in any duties. Bush did not fail in his responsibility, because he had no responsibility, which meant there was no cognitive dissonance for the Mormons.
If you follow the Net Approval Map animation, you’ll see that net approval ratings in the three states have continued to drop through time. That is to be expected, with increasing media criticism and the mountain of evidence piling up against the Bush administration. It’s also due to another cognitive bias: the bandwagon effect, or the tendency to believe things because many other people believe them. But as the quoted Mr. Craft indicates, most Mormons still stick with Bush because nothing has ever happened to break through their disconfirmation bias.
The Times author, Timothy Egan, goes to Provo, Utah, (85% Mormon) to ask the locals why they are standing by their man. He gets some superficial answers, but doesn’t ask the right question. Egan gets closest in this paragraph:
“All of the administration's perceived failures, including the Iraq war, Hurricane Katrina and the budget deficit, go through a different filter in these Bush strongholds. Sounding a familiar theme, Mr. Craft said he was distrustful of news media portrayals of Mr. Bush because ‘they concentrate too much on the negative and certain small things.’”
The real question is why do the Mormons have a different filter? As a recovering Mormon and former Republican, I can tell you, but first we have to take a detour through some interesting psychology: cognitive biases.
It is an unfortunate failure of higher education that every college graduate does not know that all human beings have systematic biases in processing information. We know the other guy is definitely biased, but we think of ourselves as the paragon of fact-based objectivity. Yet psychologists have demonstrated a number of systematic cognitive biases that everybody shares, the relevant ones here being the confirmation and disconfirmation biases. As human beings, we appear hard-wired to search for and accept uncritically information that confirms our prior beliefs, and to discount and harshly criticize information that contradicts our prior beliefs. At the extreme we simply won’t listen to information that contradicts what we believe (and flip the channel over to Fox News).
For someone to change an opinion requires either a steady stream of contradictory information that eventually becomes too overwhelming to ignore, or a single big event that is so shocking it insists that one consider a new world view.
You can see this occur in the nation as a whole. From the day Bush took office, there has been a steady stream of negative information regarding the Bush administration’s job performance, but prior to the 2004 election nobody but registered Democrats was listening. After the 2004 election, this pile of information became a mountain, and more people started changing their mind. Then along came Katrina. Hurricane Katrina was the big event that shocked nearly everyone out of their belief that Bush was a great leader. But the changes in job approval didn’t occur overnight. Katrina opened everyone’s mind to the possibility that he was a lousy leader, and allowed them to give more credence to the continuing stream of bad news about the Bush administration. Look at the Net Approval map again, and click on the June 2005 through November 2005 maps. You’ll see that Katrina did not have a big impact in September on Bush’s net approval rating, but built up throughout October and November.
Did you notice something else? What’s up with those three red states? The numbers bounce around a bit, but stay pretty much as red by November 2005 as they were in June 2005. Approval ratings changed most in Wyoming, where there are the fewest Mormons. Katrina did not touch the Mormons’ opinions!
So what is different about Mormons’ world view that Hurricane Katrina did not create any cognitive dissonance regarding Bush’s leadership skills?
Mormons do not believe the federal government was negligent in its response to Hurricane Katrina. They believe the Constitution was inspired in order to allow the true church of Christ to be restored to the earth in the United States, but they have a strong historical lore full of stories of government persecution, so they want nothing more than to keep the government out of their lives. (Except regarding abortion and gay marriage.) Like western settlers in general, they are self-reliant; like religious conservatives they believe the church should be a mutual aid society – on steroids. The Mormons have a church welfare system unrivaled by any other church, and church doctrine insists that members should rely on the church before the government. They take care of themselves, and they do a damn good job.
That Louisiana was not prepared to take care of itself was tragic, but from the Mormon point of view, that doesn’t mean the federal government was lax in any duties. Bush did not fail in his responsibility, because he had no responsibility, which meant there was no cognitive dissonance for the Mormons.
If you follow the Net Approval Map animation, you’ll see that net approval ratings in the three states have continued to drop through time. That is to be expected, with increasing media criticism and the mountain of evidence piling up against the Bush administration. It’s also due to another cognitive bias: the bandwagon effect, or the tendency to believe things because many other people believe them. But as the quoted Mr. Craft indicates, most Mormons still stick with Bush because nothing has ever happened to break through their disconfirmation bias.
Saturday, June 03, 2006
Progressive Economics, Not Wal-Mart Bashing
I’ve heard a lot of Wal-Mart bashing from the left, and it generally comes couched in so much knee-jerk French-style* anti-globalization talk that I had taken to dismissing Wal-Mart bashers as, well, not quite getting the big picture. They know something’s wrong, but can’t quite put their finger on it.
Meet my new hero: Wal-Mart antagonist Andy Stern, the motivating force behind Maryland’s new law requiring employers with more than 10,000 workers, i.e. Wal-Mart, to spend at least 8% of its payroll on health care. This man gets the big picture, and oh, is he devious. In "The New War Over Wal-Mart" in the June 2006 issue of The Atlantic, Joshua Green quotes Stern, “My goal is to get Wal-Mart’s leadership out there in traffic and holler, ‘We can no longer compete in the global economy when health care is factored into the cost of our products.’ If Wal-Mart’s CEO, Lee Scott, were to come out and say, “We need a national health-care system that works for everyone,’ then it’s a whole new ball game.” In other words, he’s squeezing Wal-mart, in order to get Wal-Mart to use its size and influence to force national health care reform.
Pay attention, lefties; Stern has put his finger on the problem with employer-provided health-care coverage. Let me put it in Econ 101 language, so the next time one of your Republican friends throws at you, “What, do you want socialized medicine?” as if it’s an epithet, you can come right back at the only level they understand—freshman economics.
It is really quite perverse that Americans expect employers to provide group health insurance. (It is also an interesting bit of economic history. See this Economic History Net article for a discussion of the twists and turns in the development of health insurance in the United States.) We all learned in Econ 101 that firms are profit maximizers. So why would we expect them to provide group health insurance? They do so now mainly because of the favorable tax treatment: health care benefits aren’t taxed, so health insurance works as a payment to employees that is more valuable to the employees than it costs the employers. Unfortunately, tax incentives don’t help when the value of the labor isn’t high enough to cover the cost of the health insurance, thanks in part to spiraling costs resulting from a lot of factors we aren’t covering here today.
Sometimes it is profitable to be good to employees, to pay them well and ensure their good health so that they end up being more productive. But often it’s not. In the retail industry, where turnover is high and unskilled workers are plentiful, it’s cheaper to count on turnover and let employees deal with their health problems on their own dime. Having a social conscience when it is not profitable is only possible in an industry that is not very competitive, which in practice usually means a growing industry in which firms have not yet been subjected to the long-run competitive forces of the market. Americans like competition in markets, for pretty good reasons. Even the leaders of red-stated Americans claim to adore competition, despite undermining it wherever possible. (Possibly because they think the invisible hand will solve all problems, including the ones they create.)
There’s the rub: competitive forces means employers in competitive, low-wage industries can’t provide group health insurance and still remain profitable. So who is left to provide insurance? Not individuals, that’s for sure.
Employer-provided group health insurance is meant to solve an information problem: Namely, purchasers of health insurance know more about their potential health problems than the insurance company. As a result, at any price offered, the people who buy insurance will include more of those who are likely to submit high claims, because it is always a better deal for those who are more likely to fall ill. Insurance companies must be able to pay the claims, so they may have to charge a higher price to cover the claims – but then only a smaller group of people with a very high likelihood of high claims would buy the insurance. This problem, known as adverse selection in the economic jargon, results in such high insurance prices that people with ordinary risks rationally choose not to purchase insurance, even though they would like to be insured. Group insurance solves this problem, because the firm contracts to purchase insurance for all employees, a relatively random group with varying risks of falling ill, which means the insurers can provide insurance at the lower average price. And individuals cannot purchase insurance at this lower average price because of the adverse selection problem. [See Slate for a more detailed explanation of adverse selection. We’ll have to leave for another day the discussion of the many other problems in the health care market that lead to escalating costs.]
Employers in competitive markets have trouble providing health insurance. Individuals can't solve the adverse selection problem on their own. So again, who is left to solve the problem? The government. That’s what it’s good for, solving market failures. Careful government policy is required to solve the problem, whether or not the solution is “market-based.”
*French-style: When referring to meat, it means drowned in sauce. When referring to policy discussions, it means willing to debate without any understanding of basic economic principles. When referring to leisure time, it means languorous summer evenings on the terrace with a bottle of dry rosé, lively conversation, and no mosquitoes.
Meet my new hero: Wal-Mart antagonist Andy Stern, the motivating force behind Maryland’s new law requiring employers with more than 10,000 workers, i.e. Wal-Mart, to spend at least 8% of its payroll on health care. This man gets the big picture, and oh, is he devious. In "The New War Over Wal-Mart" in the June 2006 issue of The Atlantic, Joshua Green quotes Stern, “My goal is to get Wal-Mart’s leadership out there in traffic and holler, ‘We can no longer compete in the global economy when health care is factored into the cost of our products.’ If Wal-Mart’s CEO, Lee Scott, were to come out and say, “We need a national health-care system that works for everyone,’ then it’s a whole new ball game.” In other words, he’s squeezing Wal-mart, in order to get Wal-Mart to use its size and influence to force national health care reform.
Pay attention, lefties; Stern has put his finger on the problem with employer-provided health-care coverage. Let me put it in Econ 101 language, so the next time one of your Republican friends throws at you, “What, do you want socialized medicine?” as if it’s an epithet, you can come right back at the only level they understand—freshman economics.
It is really quite perverse that Americans expect employers to provide group health insurance. (It is also an interesting bit of economic history. See this Economic History Net article for a discussion of the twists and turns in the development of health insurance in the United States.) We all learned in Econ 101 that firms are profit maximizers. So why would we expect them to provide group health insurance? They do so now mainly because of the favorable tax treatment: health care benefits aren’t taxed, so health insurance works as a payment to employees that is more valuable to the employees than it costs the employers. Unfortunately, tax incentives don’t help when the value of the labor isn’t high enough to cover the cost of the health insurance, thanks in part to spiraling costs resulting from a lot of factors we aren’t covering here today.
Sometimes it is profitable to be good to employees, to pay them well and ensure their good health so that they end up being more productive. But often it’s not. In the retail industry, where turnover is high and unskilled workers are plentiful, it’s cheaper to count on turnover and let employees deal with their health problems on their own dime. Having a social conscience when it is not profitable is only possible in an industry that is not very competitive, which in practice usually means a growing industry in which firms have not yet been subjected to the long-run competitive forces of the market. Americans like competition in markets, for pretty good reasons. Even the leaders of red-stated Americans claim to adore competition, despite undermining it wherever possible. (Possibly because they think the invisible hand will solve all problems, including the ones they create.)
There’s the rub: competitive forces means employers in competitive, low-wage industries can’t provide group health insurance and still remain profitable. So who is left to provide insurance? Not individuals, that’s for sure.
Employer-provided group health insurance is meant to solve an information problem: Namely, purchasers of health insurance know more about their potential health problems than the insurance company. As a result, at any price offered, the people who buy insurance will include more of those who are likely to submit high claims, because it is always a better deal for those who are more likely to fall ill. Insurance companies must be able to pay the claims, so they may have to charge a higher price to cover the claims – but then only a smaller group of people with a very high likelihood of high claims would buy the insurance. This problem, known as adverse selection in the economic jargon, results in such high insurance prices that people with ordinary risks rationally choose not to purchase insurance, even though they would like to be insured. Group insurance solves this problem, because the firm contracts to purchase insurance for all employees, a relatively random group with varying risks of falling ill, which means the insurers can provide insurance at the lower average price. And individuals cannot purchase insurance at this lower average price because of the adverse selection problem. [See Slate for a more detailed explanation of adverse selection. We’ll have to leave for another day the discussion of the many other problems in the health care market that lead to escalating costs.]
Employers in competitive markets have trouble providing health insurance. Individuals can't solve the adverse selection problem on their own. So again, who is left to solve the problem? The government. That’s what it’s good for, solving market failures. Careful government policy is required to solve the problem, whether or not the solution is “market-based.”
*French-style: When referring to meat, it means drowned in sauce. When referring to policy discussions, it means willing to debate without any understanding of basic economic principles. When referring to leisure time, it means languorous summer evenings on the terrace with a bottle of dry rosé, lively conversation, and no mosquitoes.
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