Game-changer?

Today we were on the verge of adopting this very placid and sweet-tempered 4-year old male cat named Seymour, when I noticed a mysterious lump on his belly. Could be nothing, but no adoption until the shelter has a vet check him out.

UPDATE: Looks like he's coming home with us in a few days after minor (?) surgery to fix an umbilical hernia.

FURTHER UPDATE: We've got him, after umbilical hernia surgery. Very calm yet affectionate.

Some interesting health reform ideas

With the Obama health reform plan evidently struggling, a host of different (political and substantive) approaches are being suggested. Two in today's NY Times alone.

Glenn Hubbard suggests reducing the exclusion for employer-provided healthcare and using the revenue to expand health insurance availability, e.g., via tax credits to the low-income uninsured for purchasing it.

Zero chance this is politically acceptable to either side, but a decent idea substantively, especially if the limit to the employer-provided exclusion targets coverage of routine care outlays.

BTW, Glenn also says Bush blew it in 2005 in his Social Security initiative by emphasizing private accounts rather than addressing financing (in particular at the expense of the upper-income) in exchange for expanding low-income saving. Once again, good policy thinking by my lights but no way this would have worked politically. The left would have said no, and for Karl Rove types in the Bush Administration, drunk as they were at the time on their hubris, the chief goal was to dismantle the belief that Social Security was a government program, as a tool for broader political point-scoring (i.e., they might have been happy with a substantively identical program to the current one in which the checks seniors got changed in only one respect: they purported to be from private companies rather than the government). Of course, it turns out this didn't matter because angry seniors at the healthcare forums appear to believe that neither Social Security nor Medicare are government programs. But that's another matter.

Meanwhile, Bill Bradley recalls that 1986 tax reform was a grand bargain founded on base-broadening for the Democrats in exchange for lower rates for the Republicans. Could we do it again in healthcare? He proposes universal coverage in exchange for tort reform.

Small aside, the empirical literature I'm aware of suggests that, while tort reform would help the problem of rising healthcare costs, it wouldn't do nearly enough. An opinionated senior doctor I was talking with the other day emphatically disagreed (based of course only on his anecdotal sense), arguing that defensive medicine is so prevalent that it would make a big difference.

Obama, in leaving tort reform out of the health reform package, either (a) wisely avoided picking one fight too many as the savings weren't big enough, or (b) cynically catered to the Democrats' trial lawyer lobby, on his own behalf or for Democratic support on the Hill. Take your pick, or say both if you like. I myself am sympathetic to a degree to tort reform, even though it's grossly wrong as a theoretical matter to have doctors not bear the costs of negligence so they will have the right incentives, because I have the sense that the liability process is so wildly askew that we aren't really advancing proper care sufficiently by having it. Being found liable may be more like losing the lottery than anything else, if the outcomes are random enough. But I am not expert in this area, and I'd certainly like people who leave in sponges, sever the wrong blood vessel, etc. to face liability.

Is Bradley right that this bargain could work? I'd like to think so but am skeptical both politically (would either side accept it?) and substantively (does tort reform, especially if tailored responsibly, come close to paying for the other piece?).

Maybe put all these things in the hopper together? But again, presumably it isn't happening.

One last thought, purely on the politics. Shouldn't Obama have called the public option "buying into Medicare," so long as its financing were explicitly separate? People couldn't possibly have gotten hysterical about that given Medicare's popularity. Dumb mistake not to have done it, which is not to say it would have been a good approach in substance.

Krugman comes around?

In reading Paul Krugman, it's important to resist Broderism, or centrism for its own sake. For example, his saying harsh things about the Republicans, or arguing that the stimulus package needs to be much bigger than the political consensus has it, sound "extreme" in the standard Washington framework, but ought to be evaluated straight on the merits, where they often prove more convincing than the "reasonable" competition.

But I certainly have had an enduring disagreement with him about the long-term fiscal sustainability problem, concerning which he, to my mind, has been overly dismissive. Only - might he finally be moving my way on this?

My recent book on the subject bears the tell-all title, "Taxes, Spending, and the U.S. Government's March Toward Bankruptcy." I discuss the parade of horribles towards which the U.S. is headed under current policy (a plausible playout could involve hyper-inflation, a bigger wave of bank failures than in 2008, etc.). I note healthcare's central role in the problem, but am a bit less willing than Krugman and others in his camp on this issue to say it's JUST healthcare (as there are other contributing elements as well).

Most importantly, I note that the fundamental problem is political, not economic. Under any reasonable economic and demographic path (leaving aside those that would imply disaster wholly apart from whether there's a fiscal collapse), it's in principle quite easy to fix things. If you put a couple of leading economic experts - say, one liberal and one conservative but both sane and reasonable - in a room for the weekend, they could come out on Monday morning with a plan that would work fine, albeit dishing out a bit of pain and disappointment, if implemented.

The problem is that the political system probably can't get there. Given the pain involved from raising taxes and slowing the growth of healthcare-related and other outlays, a fix would require bipartisanship, of the real kind we had every now and then in the 1980s, not the phony Broder style of compromising halfway between sanity and wherever the Republican leadership lines up (a moving target, since if you give them X they will demand 2X). So a minimum requirement for our having any chance whatsoever of avoiding the collapse is that the Republicans return to sanity. Even that might not be enough (the Democrats are hardly saints on this stuff either), but without it the chance of a soft landing is not much greater than zero.

Fast-forward to Krugman's column today. He says the deficit needs to be bigger for the next couple of years. OK, agreed unless there's a tradeoff down the road if, for reasons of political economy, this produces higher deficits in the future when stabilization policy wouldn't indicate having them.

Then he turns to the long-term problem. "So is there anything to worry about? Yes, but the dangers are political, not economic." OK, we certainly agree on that.

Then comes the bit that shocked and stunned me when I skimmed the paper quickly this morning before going to work. Only, I turn out to have read it out of context. After noting that eventually "the U.S. government will have big problems unless it .... rein[s] in the growth of Medicare and Medicaid spending," he says:

"That shouldn’t be hard in the context of overall health care reform. After all, America spends far more on health care than other advanced countries, without better results, so we should be able to make our system more cost-efficient."

Here, thinking this was his bottom-line conclusion, my contact lenses almost fell out. But then comes the payoff:

"But that won’t happen, of course, if even the most modest attempts to improve the system are successfully demagogued — by conservatives! — as efforts to 'pull the plug on grandma.'

"So don’t fret about this year’s deficit; we actually need to run up federal debt right now and need to keep doing it until the economy is on a solid path to recovery. And the extra debt should be manageable. If we face a potential problem, it’s not because the economy can’t handle the extra debt. Instead, it’s the politics, stupid."

My sentiments exactly.

It looks like the informed deficit debate has gone an important extra step, unfortunately into a dead end so far as what to do about it is concerned. To people like me concerned about the overall fiscal situation, Krugman kept saying: "It isn't a fiscal problem, it's a healthcare problem." To which my initial response was: Why call it only one, when it's both? (Albeit that without the healthcare problem it would be manageable, even if requiring non-trivial policy adjustments.)

But in Taxes, Spending, and the U.S. Government's March Toward Bankruptcy, I say: It isn't actually a healthcare problem; it's a political problem. (At least in terms of what makes it insoluble.)

While I'm confident that Krugman hasn't read my book, it looks like he's come around.

The next step, which I don't think he's taken yet, is to ask how all of one's policy proposals, even for the short term, might change if one rules out rational adjustments by the political system and asks instead how it likely will adjust (e.g., if deficits, once high, are hard to lower).

Paul Krugman on zombie Reaganism

Today Paul Krugman has an op-ed in the NYT asking why Reaganism, which he defines as "an ideology that says government intervention is always bad, and leaving the private sector to its own devices is always good," continues to dominate Washington policy debate even though events of the last few years have done so much to discredit it.

He has a point, but also is missing a point.

How, why, and when markets work or don't work is theoretically well understood, and we've learned in the last few years that market failure is more pervasive than the academic consensus held a decade ago. And he is right to label the financial crisis as Exhibit A, whether one primarily blames corporate governance failures within a rational behavior framework for individuals or thinks the framework's direct limitations were more crucial.

But he leaves out the other side of the horse race between market and government solutions that is crucial to evaluations of the proper size and scope of public sector decisionmaking. That is, while pervasive market failures call for government intervention, pervasive defects in political decisionmaking call into question how much benefit to expect in practice from government intervention.

Trained as a policy-oriented economist rather than a political scientist, Krugman has a view as to what sorts of government interventions could address market failures and lead to better outcomes. His approach to politics is to hope that making good arguments and supporting (while also exhorting) the relatively good guys against the really bad guys will lead to a close enough approximation of the policies he advocates for good to result overall. If you are arguing "We should do X" and your analysis is right (X if done correctly would have good effects), that may seem to be the end of it. But in the long run one also needs a political theory of how discretion will be exercised in practice.

Consider the hands-off non-regulation of new financial products that Krugman decries. Suppose we agree that the regulatory approach he advocates, if adopted and vigorously enforced 10 years ago, would have staved off the financial collapse. But now let's suppose that the approach was already in place but we had Greenspan, the Bush Administration, and for that matter the Eastern Democrats in Congress who were tight with the financial firms calling all the shots. There's a well-known theory of regulatory capture suggesting that the regulators end up serving their "constituents" rather than the diffuse public interest. Krugman's answer, a perfectly understandable one for someone playing his role, is simply: let's demand that they do the right thing, hold their feet to the fire, put in good people, etc. Keep on fighting and don't give up the ship.

But from a broader perspective one does have to think about market failure versus government failure. And one important intellectual force keeping the "zombie" of Reaganism alive is all too well-founded skepticism about the political process, enhanced pretty much every day one reads the papers. It's hard to come up with good theoretical grounds for expecting good things to happen, even if one can identify (and fight for) policies that would have good effects.

Case in point is the public option on health insurance. Krugman today notes the view expressed by Democrats such as Senators Conrad and Nelson that, if the option were available and people chose it over private insurance, this would be "a self-evidently bad thing, rather than ... what should happen if the government plan was, in fact, better than what private insurers offer."

Well, we know (as does Krugman) where Conrad and Nelson are coming from on this. But in fact the popularity of publicly provided health insurance would be normatively ambiguous until we understood more about how it was being run and why it was proving popular. One possibility is that the genuine cost savings proponents claim such a program could provide would be operating. A second possibility is that it would be heavily enough subsidized to offer a better price. Maybe that's fine too, but it raises a different set of issues. A third possibility, by the way, is that the insurance companies would make sure it was run in order to fail.

The problem with those on-line weather forecasts

Say I want to know if it will rain this afternoon between 2 and 5 pm, and the link says 30% for each of the three one-hour segments. Without knowing anything about the correlation, how am I supposed to plan?

There seems to be no way of telling where the chance of rain, for the entire period between 2 and 5 pm, falls between the polar answers of 30% and 65.7%.

Perhaps I'm over-thinking this (or failing to look at the forecast for the day as a whole).

Healthcare reform

The current debate's lack of coherent content has been quite startling, and indeed dismaying insofar as one naively hoped for better.

I generally support what the Obama Administration is trying to do (though sometimes what that is, isn't entirely clear). In 1993, I was unsympathetic to the Clinton plan, but since then my view of how well the U.S. healthcare market functions has darkened. More on that in a moment. Unfortunately, I don't think the Administration has conveyed any clear sense of what it is trying to do, or why.

Concerning the other side in the debate, perhaps the less said, the better. I really can't say anything temperate at this point.

What is the set of problems to which the Administration's healthcare reform proposals might, with luck, be an at least partial solution? Brad DeLong once put the point quite crisply (in his moderate rather than shrill persona). To liberal economists, the big problem is adverse selection. To conservative economists, the big problem is moral hazard. And I myself would say they're both right, plus there also are externalities.

On adverse selection: Anyone who is facing uncertain healthcare expenses ought to want insurance, smoothing out the actual cost towards the expected cost. Our healthcare market does not work well to solve this problem, and that's a big reason for the millions of uninsured. The tax subsidy for employer-provided insurance contributes to this, by making risk pooling much harder for the people left over after these generally healthier groups have been cherry-picked out of the pool (so to speak).

Adverse selection, making fairly priced insurance unavailable, is inherently a big problem in healthcare if the government doesn't somehow mandate pooling, given that people often will know more about their expected future health than insurance company doctors will be able to learn. But the system created by tax benefits certainly has made things worse.

Myopic or irrational failure to insure (until it is too late) when one should have also is a problem. Likewise, the prospect of free care in the ER if one has a crisis may create an individually rational reason for under-insurance, but involving a fiscal externality. When you count as well the adverse effect on risk-pooling of people's staying out of the insurance market (contributing to adverse selection), there's a good case for mandating health insurance coverage, just as Social Security effectively mandates retirement savings.

There is an argument on the other side - why give me (or make me buy) something that costs $X if I value it at less than $X - but while that's often a good argument I personally would reject it on balance here. Note, however, that this argument applies equally to making me buy something for $X and giving it to me for free (since in that case we could simply have given me the $X instead). And the question of whether I pay the $X or get it for free is simply an input to the overall issue of post-tax and transfer wealth distribution in the society (which is not to diminish its importance, but just to put it in the proper larger context).

And finally, mixed in with adverse selection (though conceptually distinct) is that we may favor redistribution from those facing low expected healthcare costs to those facing high expected costs, in particular to the extent that brute luck rather than choice underlies the difference. Thus, mandatory insurance for which everyone was charged the same amount might be defended as combining a solution to adverse selection with a deliberative redistributive policy. By the way, lest this sound a bit lefty, it is distributionally equivalent to what the George H.W. Bush Administration would have proposed it if Bush I had won the 1992 election, via risk-adjusted subsidies for the purchase of private health insurance.

OK, on to moral hazard. One key reason the U.S. healthcare system is so wildly expensive relative to the benefits provided (where the comparison is other economically advanced countries, where people get comparably good healthcare for much less) is that we have half of a free market system, in effect - which can be worse than no market system at all. Consumer demand drives the market, but it is largely the demand of subsidized consumers who are not actually paying at the margin for what they get. Suppose that in the market for groceries or cars we had consumer demand in the driver's seat (as we do), except that people didn't actually have to pay for what they purchased (or maybe they just had a small co-pay). Whole Foods and GM might like this, but it wouldn't be good socially. Yet in healthcare, that's effectively what we have, much of the time, for people on Medicare, Medicaid, or employer-provided health insurance that overpays at the margin (relative to the optimal insurance level) due to the distorting effect of the tax subsidy.

Perhaps the food or cars analogy overstates the problem in a couple of respects. Good food and cars are fun in themselves, getting healthcare isn't and hence I'd generally only do it out of the belief that my health will benefit. Plus, doctors to a large extent tell healthcare consumers what to do. But the latter is actually a big part of the problem - they don't bear the marginal costs either, and have some reasons of both ideology and self-interest (earn more fees or practice overly defensive medicine) for recommending treatments that aren't actually worth their cost to the patient.

So we have a terrible healthcare system that surely could be vastly improved. I take the Administration to be addressing the adverse selection problem by extending health insurance to the uninsured population. Also, it may want to address under-treatment of this population (which exists alongside over-treatment of others), which I think of as a distributional issue, because being sick and treatable, but unable to afford the treatment, should raise one's estimate of the marginal utility that a transfer via free provision of the needed service would provide.

The Administration would also perhaps like to address the moral hazard problem, which is a key input to the horrendous problems of long-term fiscal unsustainability that the U.S. currently faces. Many observers are skeptical, I would guess rightly, of the progress that the current proposal would make on this front. Unfortunately, addressing it really requires bipartisanship, since cutting benefits is politically unpopular. And the Republicans couldn't make any clearer their unwillingness to cooperate in any sort of good faith effort to address waste and put healthcare outlays on a sustainable path.

One of the many offensive and odious aspects of the Republicans' hateful lying about death panels and the like is that they are actually the ones who want to provide less treatment. For those among them who are sane and believe in civil society, this mainly reflects concern about moral hazard and/or a libertarian distributional view. The rest, apparently a large majority of their number, do not bear discussing.

Rare football commentary

The Brett Favre embarrassment tour continues.

Woodstock, 40 years later

Was I there at the time? Yes, if you're willing to count being a pre-teen in the back seat of my parents' car, caught in the very outskirts of the miles-and-miles-wide traffic jam as we drove to or fro a vacation site.

Woodstock's little secret (not that my knowledge of this comes from back then) is that most of the music wasn't very good. It was a year or two too late - too grandiose and self-infatuated by that point in the evolution of rock music. And though there still were some very good things to come in the immediate offing, the already badly needed rescue by punk rock / new wave remained seven years in the future.

Another day, another review

Alan Viard, in the latest National Tax Journal (Vol LXII, No. 2, June 2009), says the following about Institutional Foundations of Public Finance, the recently published conference volume (in honor of David Bradford) that I co-edited with Alan Auerbach:

"The book is exceptionally well suited to serve as a tribute to David Bradford. The authors and discussants address the questions Bradford studied, and they do so at the same broad and conceptual, but policy-relevant, level at which he addressed them .... This book should be of interest to economists studying any of the topics that it covers, particularly those interested in fundamental tax reform. It is a fitting tribute to David Bradford and should serve as an inspiration to those seeking to carry on his work."

I would add that it's not just suitable for economists, but also people with tax policy interests generally, including those with law or other generalist backgrounds. The participants were close to a 50-50 lawyers and economists mix. But admittedly it's much more of a specialists' book than, say, this one.

Topics covered include fiscal federalism, dividend taxation, fiscal language, income and consumption taxes, and questions of transition to a consumption tax.

"Keep the guvmint off my Medicare"

The widespread view among healthcare reform foes that Medicare is not a government program inclines me to ask: If Obama gets away with this, what is the government going to take over next? Social Security?!?!?

Go ahead, make my day

Perhaps I can be forgiven for quoting highlights from the brief review of my book, Decoding the Corporate Tax (available here or here), in the August 2009 issue of Choice Magazine.

"Shaviro (New York Univ. Law School), a distinguished tax scholar, does a masterful job of bringing the critiques together and explaining their logic in a concise, lucid manner. The arguments involve some arcane economics, corporate finance, and law, but he manages to bring a degree of order from the complexity .... This is the first place to go for anyone seeking to understand the corporate income tax maze."

The book gets a 4-star rating and is deemed "essential."

Most amusing quote in the review: "Shaviro tries hard, at the end, to convince himself that the U.S. political system can yield reforms." Ah, that would be the self-described "Hollywood ending," complete with the old saying that "if wishes were horses, beggars would ride," that I added upon being told by readers that the ending was a bit too bleak.

Quote of the day

From Captain Beefheart, in an excellent 1978 live album called "I'm Gonna Do What I Wanna Do" (that being his verbal response to audience requests for favorite songs):

"It's very hard to do poetry in this world of Denny's staying open all night."

But no harder, I suppose, than trying to revise the introduction to my new book while riding the NYC subway and listening to said live album.

Excitement on the home front last night. Ursula (our small brown tabby) was making loud crunching noises in our room while we were trying to get to sleep. It turned out she had a small mouse in her mouth. As it no longer had a head, it had stopped struggling, but she has always been conscientious about chewing her food.

I suppose Freddy from the Friday the 13th movies is a good analogy for cats as seen through the eyes of their prey. Demonically playful, bloodthirsty, and equipped with multiple retracting blades. Luckily I get to see a different side of Ursula, more characterized by her rolling on her back, eyes half-closed, kneading with her paws in the air, and purring.