Tag Archive for: Health Care

Why Bernie Sanders Has to Raise Taxes on the Middle Class by Daniel Bier

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Willie Sutton was one of the most infamous bank robbers in American history. Over three decades, the dashing criminal robbed a hundred banks, escaped three prisons, and made off with millions. Today, he is best known for Sutton’s Law: Asked by a reporter why he robbed banks, Sutton allegedly quipped, “Because that’s where the money is.”

Sutton’s Law explains something unusual about Bernie Sander’s tax plan: it calls for massive tax hikes across the board. Why raise taxes on the middle class? Because that’s where the money is.

The problem all politicians face is that voters love to get stuff, but they hate to pay for it. The traditional solution that center-left politicians pitch is the idea that the poor and middle class will get the benefits, and the rich will pay for it.

This is approximately how things work in the United States. The top 1 percent of taxpayers earn 19 percent of total income and pay 38 percent of federal income taxes. The bottom 50 percent earn 12 percent and pay 3 percent. This chart from the Heritage Foundation shows net taxes paid and benefits received, per person, by household income group:

But Sanders’ proposals (free college, free health care, jobs programs, more Social Security, etc.) are way too heavy for the rich alone to carry, and he knows it. To his credit, his campaign has released a plan to pay for each of these myriad handouts. Vox’s Dylan Matthews has totaled up all the tax increases Sanders has proposed so far, and the picture is simply staggering.

Every household earning below $250,000 will face a tax hike of nearly 9 percent. Past that, rates explode, up to a top rate of 77 percent on incomes over $10 million.

Paying for Free

Sanders argues that most people’s average income tax rate won’t change, but this is only true if you exclude the two major taxes meant to pay for his health care program: a 2.2 percent “premium” tax and 6.2 percent payroll tax, imposed on incomes across the board. These taxes account for majority of the new revenue Sanders is counting on.

But it gets worse: his single-payer health care plan will cost 80 percent more than he claims. Analysis by the left-leaning scholar Kenneth Thorpe (who supports single payer) concludes that Sanders’ proposal will cost $1.1 trillion more each year than he claims. The trillion dollar discrepancy results from some questionable assumptions in Sanders’ numbers. For instance:

Sanders assumes $324 billion more per year in prescription drug savings than Thorpe does. Thorpe argues that this is wildly implausible.

“In 2014 private health plans paid a TOTAL of $132 billion on prescription drugs and nationally we spent $305 billion,” he writes in an email. “With their savings drug spending nationally would be negative.”

So unless pharmaceutical companies start paying you to take their drugs, the Sanders administration will need to increase taxes even more.

Analysis by the Tax Foundation finds that his proposed tax hikes already total $13.6 trillion over the next ten years. However, “the plan would [only] end up collecting $9.8 trillion over the next decade when accounting for decreased economic output.”

And the consequences will be truly devastating. Because of the taxes on labor and capital, GDP will be reduced 9.5 percent. Six million jobs will be lost. On average, after-tax incomes will be reduced by more than 18 percent.

Incomes for the bottom 50 percent will be reduced by more than 14 percent, and incomes for the top 1 percent will be reduced nearly 25 percent. Inequality warriors might cheer, but if you want to actually raise revenue, crushing the incomes of the people who pay almost 40 percent of all taxes isn’t the way to go.

These are just the effects of the $1 trillion tax hike he has planned — and he probably needs to double that to pay for single payer. Where will he find it? He’ll go where European welfare states go.

Being Like Scandinavia

Sanders is a great admirer of Scandinavian countries, such as Denmark, Sweden, and Norway, and many of his proposals are modeled on their systems. But to pay for their generous welfare benefits, they tax, and tax, and tax.

Denmark, Norway, and Sweden all capture between 20-26 percent of GDP from income and payroll taxes. By contrast, the United States collects only 15 percent.

Scandinavia’s tax rates themselves are not that much higher than the United States’. Denmark’s top rate is 30 percent higher, Sweden’s is 18 percent higher, and Norway’s is actually 16 percent lower — and yet Norway’s income tax raises 30 percent more revenue than the United States.

The answer lies in how progressive the US tax system is, in the thresholds at which people are hit by the top tax rates. The Tax Foundation explains,

Scandinavian income taxes raise a lot of revenue because they are actually rather flat. In other words, they tax most people at these high rates, not just high-income taxpayers.

The top marginal tax rate of 60 percent in Denmark applies to all income over 1.2 times the average income in Denmark. From the American perspective, this means that all income over $60,000 (1.2 times the average income of about $50,000 in the United States) would be taxed at 60 percent. …

Compare this to the United States. The top marginal tax rate of 46.8 percent (state average and federal combined rates) kicks in at 8.5 times the average U.S. income (around $400,000). Comparatively, few taxpayers in the United States face the top marginal rate.

The reason European states can pay for giant welfare programs is not because they just tax the rich more — it’s because they also scoop up a ton of middle class income. The reason why the United States can’t right now is its long-standing political arrangement to keep taxes high on the rich so they can be low on the poor and middle.

Where the Money Is – And Isn’t

As shown by the Laffer Curve, there is a point at which increasing tax rates actually reduces tax revenue, by discouraging work, hurting the economy, and encouraging tax avoidance.

Bernie’s plan already hammers the rich: households earning over $250,000 (the top 3 percent) would face marginal rates of 62-77 percent — meaning the IRS would take two-thirds to three-quarters of each additional dollar earned. His proposed capital gains taxes are so high that they are likely well past the point of positive returns. The US corporate tax rate of 40 percent is already the highest in the world, and even Sanders hasn’t proposed increasing it.

The only way to solve his revenue problem is to raise rates on the middle and upper-middle classes, or flatten the structure to make the top rates start kicking in much lower. You can see why a “progressive” isn’t keen on making more regressive taxes part of his platform, but the money has to come from somewhere.

The bottom fifty percent don’t pay much income tax now (only $34 billion), but they also don’t earn enough to fill the gap. Making their taxes proportionate to income would only raise $107 billion, without even considering how the higher rates would reduce employment and income.

The top 5 percent are pretty well wrung dry by Sanders’ plan, and their incomes are going to be reduced by 20-25 percent anyway. It’s hard to imagine that there’s much more blood to be had from that stone.

But households between the 50th and the 95th percentile (incomes between $37,000 to $180,000 a year) earn about 54 percent of total income — a share would likely go up, given the larger income reductions expected for top earners. Currently, this group pays only 38 percent of total income taxes, and, despite the 9 percent tax hike, they’re comparatively spared by the original tax plan. Their incomes are now the lowest hanging fruit on the tax tree.

As they go to the polls this year, the middle class should remember Sutton’s Law.

Daniel Bier

Daniel Bier

Daniel Bier is the editor of Anything Peaceful. He writes on issues relating to science, civil liberties, and economic freedom.

Government Caused the ‘Great Stagnation’ by Peter J. Boettke

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Tyler Cowen caused quite a stir with his e-book, The Great Stagnation. In properly assessing his work it is important to state explicitly what his argument actually is. Median real income has stagnated since 1980, and the reason is that the rate of technological advance has slowed. Moreover, the technological advances that have taken place with such rapidity in recent history have improved well-being, but not in ways that are easily measured in real income statistics.

Critics of Cowen more often than not miss the mark when they focus on the wild improvements in our real income due to quality improvements (e.g., cars that routinely go over 100,000 miles) and lower real prices (e.g., the amount of time required to acquire the inferior version of yesterday’s similar commodities).

Cowen does not deny this. Nor does Cowen deny that millions of people were made better off with the collapse of communism, the relative freeing of the economies in China and India, and the integration into the global economy of the peoples of Africa and Latin America. Readers of The Great Stagnation should be continually reminded that they are reading the author of In Praise of Commercial Culture and Creative Destruction. Cowen is a cultural optimist, a champion of the free trade in ideas, goods, services and all artifacts of mankind. But he is also an economic realist in the age of economic illusion.

What do I mean by the economics of illusion? Government policies since WWII have created an illusion that irresponsible fiscal policy, the manipulation of money and credit, and expansion of the regulation of the economy is consistent with rising standards of living. This was made possible because of the “low hanging” technological fruit that Cowen identifies as being plucked in the 19th and early 20th centuries in the US, and in spite of the policies government pursued.

An accumulated economic surplus was created by the age of innovation, which the age of economic illusion spent down. We are now coming to the end of that accumulated surplus and thus the full weight of government inefficiencies are starting to be felt throughout the economy. Our politicians promised too much, our government spends too much, in an apparent chase after the promises made, and our population has become too accustomed to both government guarantees and government largess.

Adam Smith long ago argued that the power of self-interest expressed in the market was so strong that it could overcome hundreds of impertinent restrictions that government puts in the way. But there is some tipping point at which that ability to overcome will be thwarted, and the power of the market will be overcome by the tyranny of politics. Milton Friedman used that language to talk about the 1970s; we would do well to resurrect that language to talk about today.

Cowen’s work is a subversive track in radical libertarianism because he identifies that government growth (both measured in terms of scale and scope) was possible only because of the rate of technological improvements made in the late 19th and early 20th century.

We realized the gains from trade (Smithian growth), we realized the gains from innovation (Schumpeterian growth), and we fought off (in the West, at least) totalitarian government (Stupidity). As long as Smithian growth and Schumpeterian growth outpace Stupidity, tomorrow’s trough will still be higher than today’s peak. It will appear that we can afford more Stupidity than we can actually can because the power of self-interest expressed through the market offsets its negative consequences.

But if and when Stupidity is allowed to outpace the Smithian gains from trade and the Schumpeterian gains from innovation, then we will first stagnate and then enter a period of economic backwardness — unless we curtail Stupidity, explore new trading opportunities, or discover new and better technologies.

In Cowen’s narrative, the rate of discovery had slowed, all the new trading opportunities had been exploited, and yet government continued to grow both in terms of scale and scope. And when he examines the 3 sectors in the US economy — government services, education, and health care — he finds little improvement since 1980 in the production and distribution of the services. In fact, there is evidence that performance has gotten worse over time, especially as government’s role in health care and education has expanded.

The Great Stagnation is a condemnation of government growth over the 20th century. It was made possible only by the amazing technological progress of the late 19th and early 20th century. But as the rate of technological innovation slowed, the costs of government growth became more evident. The problem, however, is that so many have gotten used to the economics of illusion that they cannot stand the reality staring them in the face.

This is where we stand in our current debt ceiling debate. Government is too big, too bloated. Washington faces a spending problem, not a revenue problem. But too many within the economy depend on the government transfers to live and to work. Yet the economy is not growing at a rate that can afford the illusion. Where are we to go from here?

Cowen’s work makes us think seriously about that question. How can the economic realist confront the economics of illusion? And Cowen has presented the basic dilemma in a way that the central message of economic realism is not only available for libertarians to see (if they would just look, or listen carefully to his podcast at EconTalk), but for anyone who is willing to read and think critically about our current political and economic situation.

The Great Stagnation signals the end of the economics of illusion and — let’s hope — paves the way for a new age of economic realism.

This post first appeared at Coordination Problem.

Peter J. BoettkePeter J. Boettke

Peter Boettke is a Professor of Economics and Philosophy at George Mason University and director of the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center. He is a member of the FEE Faculty Network.

RELATED ARTICLE: 5 Reasons Why America Is Headed to a Budget Crisis

Video Game Developers Face the Final Boss: The FDA by Aaron Tao

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As I drove to work the other day, I heard a very interesting segment on NPR that featured a startup designing video games to improve cognitive skills and relieve symptoms associated with a myriad of mental health conditions.

One game, Project Evo, has shown good preliminary results in training players to ignore distractions and stay focused on the task at hand:

“We’ve been through eight or nine completed clinical trials, in all cognitive disorders: ADHD, autism, depression,” says Matt Omernick, executive creative director at Akili, the Northern California startup that’s developing the game.

Omernick worked at Lucas Arts for years, making Star Wars games, where players attack their enemies with light sabers. Now, he’s working on Project Evo. It’s a total switch in mission, from dreaming up best-sellers for the commercial market to designing games to treat mental health conditions.

“The qualities of a good video game, things that hook you, what makes the brain — snap — engage and go, could be a perfect vessel for actually delivering medicine,” he says.

In fact, the creators believe their game will be so effective it might one day reduce or replace the drugs kids take for ADHD.

This all sounds very promising.

In recent years, many observers (myself included) have expressed deep concerns that we are living in the “medication generation,” as defined by the rapidly increasing numbers of young people (which seems to have extended to toddlers and infants!) taking psychotropic drugs.

As experts and laypersons continue to debate the long-term effects of these substances, the news of intrepid entrepreneurs creating non-pharmaceutical alternatives to treat mental health problems is definitely a welcome development.

But a formidable final boss stands in the way:

[B]efore they can deliver their game to players, they first have to go through the Food and Drug Administration — the FDA.

The NPR story goes on to detail on how navigating the FDA’s bureaucratic labyrinth is akin to the long-grinding campaign required to clear the final dungeon from any Legend of Zelda game. Pharmaceutical companies are intimately familiar with the FDA’s slow and expensive approval process for new drugs, and for this reason, it should come as no surprise that Silicon Valley companies do their best to avoid government regulation. One venture capitalist goes so far as to say, “If it says ‘FDA approval needed’ in the business plan, I myself scream in fear and run away.”

Dynamic, nimble startups are much more in tune with market conditions than the ever-growing regulatory behemoth that is defined by procedure, conformity, and irresponsibility. As a result, conflict between these two worlds is inevitable:

Most startups can bring a new video game to market in six months. Going through the FDA approval process for medical devices could take three or four years — and cost millions of dollars.

In the tech world, where app updates and software patches are part of every company’s daily routine just to keep up with consumer habits, technology can become outdated in the blink of an eye. Regulatory hold on a product can spell a death sentence for any startup seeking to stay ahead of its fierce market competition.

Akili is the latest victim to get caught in the tendrils of the administrative state, and worst of all, in the FDA, which distinguished political economist Robert Higgs has described as “one of the most powerful of federal regulatory agencies, if not the most powerful.” The agency’s awesome authority extends to over twenty-five percent of all consumer goods in the United States and thus “routinely makes decisions that seal the fates of millions.”

Despite its perceived image as the nation’s benevolent guardian of health and well-being, the FDA’s actual track record is anything but, and its failures have been extensively documented in a vast economic literature.

The “knowledge problem” has foiled the whims of central planners and social engineers in every setting, and the FDA is not immune. By taking a one-sized-fits-all approach in enacting regulatory policy, it fails to take into account the individual preferences, social circumstances, and physiological attributes of the people that compose a diverse society.

For example, people vary widely in their responses to drugs, depending on variables that range from dosage to genetic makeup. In a field as complex as human health, an institution forcing its way on a population is bound to cause problems (for a particularly egregious example, see what happened with the field of nutrition).

The thalidomide tragedy of the 1960s is usually cited as to why we need a centralized, regulatory agency staffed by altruistic public servants to keep the market from being flooded by toxins, snake oils, and other harmful substances. However, this needs to be weighed against the costs of keeping beneficial products withheld.

For example, the FDA’s delay of beta blockers, which were widely available in Europe to reduce heart attacks, was estimated to have cost tens of thousands of lives. Despite this infamous episode and other repeated failures, the agency cannot overcome the institutional incentives it faces as a government bureaucracy. These factors strongly skew its officials towards avoiding risk and getting blamed for visible harm. Here’s how the late Milton Friedman summarized the dilemma with his usual wit and eloquence:

Put yourself in the position of a FDA bureaucrat considering whether to approve a new, proposed drug. There are two kinds of mistakes you can make from the point of view of the public interest. You can make the mistake of approving a drug that turns out to have very harmful side effects. That’s one mistake. That will harm the public. Or you can make the mistake of not approving a drug that would have very beneficial effects. That’s also harmful to the public.

If you’re such a bureaucrat, what’s going to be the effect on you of those two mistakes? If you make a mistake and approve a product that has harmful side effects, you are a devil incarnate. Your misdeed will be spread on the front page of every newspaper. Your name will be mud. You will get the blame. If you fail to approve a drug that might save lives, the people who would object to that are mostly going to be dead. You’re not going to hear from them.

Critics of America’s dysfunctional healthcare system have pointed out the significant role of third-party spending in driving up prices, and how federal and state regulations have created perverse incentives and suppressed the functioning of normal market forces.

In regard to government restrictions on the supply of medical goods, the FDA deserves special blame for driving up the costs of drugs, slowing innovation, and denying treatment to the terminally ill while demonstrating no competency in product safety.

Going back to the NPR story, a Pfizer representative was quoted in saying that “game designers should go through the same FDA tests and trials as drug manufacturers.”

Those familiar with the well-known phenomenon of regulatory capture and the basics of public choice theory should not be surprised by this attitude. Existing industries, with their legions of lobbyists, come to dominate the regulatory apparatus and learn to manipulate the system to their advantage, at the expense of new entrants.

Akili and other startups hoping to challenge the status quo would have to run past the gauntlet set up by the “complex leviathan of interdependent cartels” that makes up the American healthcare system. I can only wish them the best, and hope Schumpeterian creative destruction eventually sweeps the whole field of medicine.

Abolishing the FDA and eliminating its too-often abused power to withhold innovative medical treatments from patients and providers would be one step toward genuine healthcare reform.

A version of this post first appeared at The Beacon.

Aaron Tao
Aaron Tao

Aaron Tao is the Marketing Coordinator and Assistant Editor of The Beacon at the Independent Institute. Follow him on Twitter here.

Who Will Protect Us from Tainted Food Trucks? by B.K. Marcus

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My Haitian babysitter told me to get into the car, an old sedan with peeling paint, driven by a stranger. She’d hailed it, like a cab, and it pulled over for us, like a cab, but it didn’t look like a cab.

“I thought you said we were taking a taxi,” I said.

“This is a taxi.” She pushed me into the back seat.

“It doesn’t look like a taxi,” I whispered.

“Real taxis don’t come into this neighborhood,” she said. “This is a gypsy.”

I thought she was describing the ethnicity of the driver. Only later, listening to radio news reports about city police campaigns against gypsy cab drivers did I understand that my babysitter had dragged me into a mobile version of the black market.

That brief ride through a 1970s New York City ghetto was my only time in a gypsy cab: a bewildered little boy forced into the car of a man I didn’t know. It felt dangerous in a way that even hitchhiking in the Middle East when I was a teenager did not.

So why do I use Uber and Lyft without hesitation? Why do I prefer gray-market ride sharing with unlicensed strangers to hailing a municipally sanctioned taxi?

At this point, my confidence is based on past experience: the dozens of Uber drivers I’ve had were far more pleasant than the hundreds of cab drivers I’ve ridden with. But even my very first time with Uber, I got in without hesitation.

Peer-to-peer apps have made reputation markets real and robust — at least in certain corners of the service economy. Uber drivers have far greater incentive to make me happy than any cab driver ever has. More than their tip depends on it: the rating I give them can affect their future earnings.

Cab companies could have adopted reputation apps years ago as a way to outdo their competitors. But they weren’t worried about competition. City licensing often creates a protective cartel for current cabbies. That’s why Uber and Lyft became so popular so fast: the market — meaning everyone looking for a ride — wanted what the cab industry felt no need to offer us.

Will food trucks be the next service to escape the archaic model of licensing and regulation?

“Illegal Food Trucks Worry Health Officials,” reports the Herald-Sun of Durham, North Carolina. “Unlicensed food trucks operating illegally in Durham have health officials concerned that customers could end up getting sick.”

One such official, Chris Salter, told the paper that people selling food from the back of SUVs have posed food-poisoning risks to the public for years: “Did they slaughter a chicken in their backyard and cut it up on a piece of plywood? You just don’t know.”

The solution Salter proposes, of course, is stricter policing and greater regulation. After all, if cops and bureaucrats don’t protect the public, who will?

To the generation that reads newspapers and waits in line for taxis, the argument makes sense: when you eat in a restaurant, you may not know for sure that the food is safe, but the restaurant isn’t going anywhere; even without a health inspector’s oversight, restaurant owners have an incentive to protect their reputations. It’s not hard to spread the word that you got sick eating at Big Joe’s on the corner of 1st and Main. It’s a lot less helpful to say you ate a bad fajita out of the back of a faded green RAV4 in the abandoned parking lot.

When I used to take city cabs, the seats were filthy, the driving was reckless, and the drivers ranged from sullen to rude. But I felt relatively safe. I knew I could always write down the cabby’s name and medallion number. In theory, at least, I could report him and maybe someone would wag a finger at him. That seemed better than nothing.

Licensed food trucks offer a similar assurance: “Salter’s advice to the public is to look for the health grade card at food trucks if they’re unsure whether it’s operating legally. Since 2012, food trucks have been required to display the same cards as restaurants.”

Again, even without the health inspection required to get a permit and a health grade card, food truck owners don’t want to risk customers’ health for fear of losing their permits or having to display a lackluster “health grade” on their cards.

Government licensing acts as a sort of hampered reputation market. The food SUVs have no such incentives.

As in the case of cabbies versus Uber drivers, the legitimate food truck owners are on the side of the government officials: “Many of those owners are upset because the illegal trucks skirt regulation fees and cut into their business.”

Food trucks in Durham may not yet operate as a cartel — the way they are beginning to do in New York City, for example, where the number of food-truck licenses has been frozen for years — but the complaint is typical of the established players in a protected industry: upstarts with lower costs are threatening our profit margin!

But suppose you’re a foodie with fear of salmonella. Would you rather rely on an 11-month-old government report card or just check your food-truck app to see what your fellow foodies have to say? What sort of insurance does the owner carry — what third-party assurance is available? How’s their guacamole?

Don’t like this truck’s rating? The app will guide you to the next nearest truck serving similar fare.

Salter told the Herald-Sun, “We’re not trying to keep anybody from making a living. We’re trying to be fair and to protect the public.” So why is he offering 20th-century advice to consumers in the 21st century? Might he have any interests at stake other than public safety?

No doubt health officials would counter that the sharing economy is an option only for the privileged. It’s not like everyone has a smart phone, right? Right?

Many of the illegal vendors speak only Spanish, Salter told the Herald-Sun. And “many of them can’t read, so even if we pass out documents, they can’t read them.”

So who buys questionable chicken out of the back of an SUV operated by illiterate, Spanish-speaking strangers when Durham has so many government-approved food trucks with English-speaking staff?

Might those who choose to do so be similar to those who hailed gypsy cabs in the New York City of my youth?

“Real taxis don’t come into this neighborhood,” my babysitter had told me. I didn’t need to ask why. I didn’t want to be in that area either. But folks in the bad neighborhoods still needed rides, and they were willing to pay for them. There was extra risk involved for both parties, and the drivers couldn’t make the kind of money that licensed taxi drivers made, but driving a gypsy cab was better than their next-best option, so supply and demand met in illegal exchanges that benefitted both parties.

It’s safe to assume something similar is going on at the back of some of Durham’s SUVs.

These are most likely working people on the margins of the economy who don’t have the time or the money to seek a quick lunch elsewhere. If they’re buying their food from obviously unlicensed and uninspected vendors, that suggests that the higher-scale food trucks aren’t coming to their neighborhood — or that they charge considerably more than the illegal food.

The health officials aren’t protecting these people. At best, they are limiting their options. Worse, they could be driving economic exchanges further underground, where neither the government nor the market can effectively regulate safety.

Salter implies that vendor noncompliance is the result of ignorance, but it’s more likely buyers and sellers who don’t feel especially well protected by the legal system are taking measured risks to improve each other’s lives.

And I bet plenty of them do have smart phones. What they need now isn’t more ardent government oversight; it’s more reliable reputation markets. If there isn’t already an app for that, there soon will be.

B.K. Marcus

B.K. Marcus is managing editor of the Freeman.

“SCOTUScare”: Supreme Court Guts Obamacare to Uphold Subsidies by Daniel Bier

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The Supreme Court has voted 6-3 (with Chief Justice Roberts writing the majority opinion, joined by Justice Kennedy and the four liberal justices) to uphold the subsidies the IRS is distributing for health insurance plans purchased on the federal insurance exchange.

This ruling sets a dangerous precedent, and its reasoning is, as Justice Scalia wrote in his dissent, “quite absurd.”

There will no doubt be much written about the decision in the coming days, and almost all of it will mischaracterize the ruling as the Supreme Court “saving” the Affordable Care Act again.

This is a crucial error: The Court’s ruling guts the ACA and rewrites [it] in a way that is politically convenient for the president — again.

When the Patient Protection and Affordable Care Act was passed in 2010, the law was designed to work through a “cooperative federalism” approach. For example, the portion of the law expanding Medicaid, like the rest of Medicaid, would be a joint federal-state program, partly funded and regulated by the feds but administered by the states.

The part of the law meant to increase individually purchased insurance coverage was similarly designed to work through federal-state cooperation.

Each state would set up its own health insurance “exchange,” and the federal government would issue tax credits for qualified individuals who purchased policies on the state exchanges. The logic here is that the states are best suited to run exchanges for their residents, as they have particular and specialized knowledge about other state healthcare programs, state regulations on insurance, and their residents’ health needs.

But the law did not (and constitutionally could not) force state governments set up exchanges. So as a backstop, a separate section of the law allows the federal government to set up an exchange for residents in states that did not set up their own.

Here’s where it got problematic: The plain text of the law only authorizes tax credits for policies purchased on an “exchange established by the State.”

There’s no easy way around this fact. Nowhere does the ACA authorize subsidies for plans purchased on the federal exchange. None of this would have been an issue if every state had chosen to build an exchange, as the law’s authors anticipated.

But in reality, the ACA has been persistently unpopular, and only 14 states (and DC) had working exchanges. The details of the backstop provision suddenly became a lot more important as the residents of 36 states were cast onto the federal exchange.

Faced with uncooperative federalism, the Obama administration suddenly had a big political problem, and it would have been quite embarrassing for the law’s biggest benefit to evaporate just as the president was planning to run for reelection on it.

So 14 months after the bill was signed into law, the IRS issued a rule, by executive fiat, to issue subsidies on the federal exchange. Because the penalty for failing [to] purchase health insurance is based on the cost of insurance, including subsidies, relative to a person’s income, individuals and businesses in states without exchanges who would otherwise have been exempt from fines and mandates were now in violation.

Lawsuits followed, which argued the IRS’s decision to issue subsidies in states that had declined to create exchanges was against the law, and it had resulted in actual harm to them.

In one of the lower court rulings on this issue, the DC Circuit concluded that the law offered no clear basis for issuing subsidies through the federal exchange.

If Congress intended to issue subsidies through the federal exchange, it would have been perfectly easy for them to say so, in any number of sections. And if Congress intended to treat the federal exchange as though it were a State entity (as the ACA does with US territories’ exchanges), it knew how to do that too. Yet there is no section of the law that does this.

Some argued that this omission was a “drafting error,” a legislative slip-up. If so, it was one it made over and over again, in at least ten different sections. And, as Michael Cannon rather pointedly asks, if it was a drafting error, why didn’t the government make that case in court? Why didn’t the IRS make that claim when they issued the new rule?

The answer may be that the law meant what the law says. The scant legislative history on this question doesn’t show that Congress ever thought that subsidies were going to be disbursed through the federal exchanges. Perhaps the law’s authors simply didn’t think about it or did not consider the possibility that most states would refuse.

But, in fact, it is entirely plausible that the ACA’s authors intended to only offer subsidies to residents of states that created exchanges, as an incentive to states to build and run them.

The reasons why Congress wanted the states to run the exchanges are perfectly clear. But, apart from the possibility of losing the subsidies, there seems to be little reason for state governments to take the risk of building one of the notoriously dysfunctional exchanges if they could dump their citizens onto the federal exchange with no consequences.

Jonathan Gruber, an MIT economist who was involved in the design of the health care law, explicitly claimed that the law’s authors did this on purpose:

If you’re a state and you don’t set up an Exchange, that means your citizens don’t get their tax credits. … I hope that’s a blatant enough political reality that states will get their act together and realize there are billions of dollars at stake here in setting up these Exchanges, and that they’ll do it.

On the other hand, the government argued (and Roberts accepted) that the text of the law is ambiguous, and ambiguous phrases should be interpreted “in their context and with a view to their place in the overall statutory scheme,” the goal of which was to increase health insurance coverage.

Given that, Roberts concludes, we should construe “exchange established by the State” to mean any ACA exchange, whether Federal or State.

Roberts got to this reasoned, methodical, and preposterous conclusion by arguing that the plain meaning of the text would lead to “calamitous results” that Congress meant to avoid. To wit, that only allowing subsidies for plans purchased on state exchanges would cause a “death spiral” in the insurance market in states that refused to establish exchanges.

The ACA reform has three basic components: subsidies for insurance plans, the individual mandate to purchase insurance, and regulations requiring insurers to issue coverage to people with preexisting conditions (“guaranteed issue”) and banning them from charging higher premiums to sicker people (“community rating”).

The “death spiral” logic goes:

  • If states chose not to establish exchanges, their residents would not get subsidies;
  • If they couldn’t get subsidies, many people would be exempt from the insurance mandate;
  • If they were exempt, they could just wait until they got sick to buy insurance;
  • If they did that, insurers would have to accept them, under the guaranteed issue rule;
  • If that happened, the price of insurance would go up for everyone, under community rating;
  • If that happened, more healthy people would drop out of the insurance market, leaving insurers with a pool of ever sicker and more expensive patients (“adverse selection”), thus forcing insurers out of business and leaving even more people without insurance. And so on.

Hence, “death spiral.” In fact, this is exactly what happened in the 1990s in many states with guaranteed issue and community rating, before Massachusetts invented the mandate to force people to buy insurance and keep the pool of insured people relatively healthy.

But in the ACA, the mandate rests on the cost of insurance with subsidies, and (under the plain text of the law) the subsidies rest on the states establishing exchanges. If the subsidies go, fewer people will buy insurance, and the mandate crumbles, leading to a spiral of higher costs and fewer people insured.

Roberts concluded that this risk would have been unacceptable to Congress, arguing: “The combination of no tax credits and an ineffective coverage requirement could well push a State’s individual insurance market into a death spiral. It is implausible that Congress meant the Act to operate in this manner.”

This perceived implausibility, combined with the alleged ambiguity of the text, caused the Court to rule in favor of the subsidies:

Petitioners’ plain-meaning arguments are strong, but the Act’s context and structure compel the conclusion that Section 36B allows tax credits for insurance purchased on any Exchange created under the Act. Those credits are necessary for the Federal Exchanges to function like their State Exchange counterparts, and to avoid the type of calamitous result that Congress plainly meant to avoid.

The basic problem with Roberts’ decision is that the text isn’t ambiguous. It’s actually pretty clear, as he acknowledged. But the second issue is that Roberts has no strong basis for his speculations about what Congress thought was likely to happen with states or what risks it was willing tolerate.

If the ACA’s authors thought (as almost everyone did) that the states would get with the program and establish their own exchanges, there is no reason that they would have assumed a serious risk of a death spiral. In fact, Gruber suggested that was the plan all along: offer a carrot to the states (the subsidies) and a stick (the risk of screwing up their insurance market).

But more importantly, the “implausible” risk that Roberts bases his interpretation on is precisely what the ACA deliberately did to US territories by imposing guaranteed issue and community rating without an individual mandate.

The DC Circuit Court that ruled against the subsidies last year made exactly this point:

The supposedly unthinkable scenario … one in which insurers in states with federal Exchanges remain subject to the community rating and guaranteed issue requirements but lack a broad base of healthy customers to stabilize prices and avoid adverse selection — is exactly what the ACA enacts in such federal territories as the Northern Mariana Islands, where the Act imposes guaranteed issue and community rating requirements without an individual mandate.

This combination, predictably, has thrown individual insurance markets in the territories into turmoil. But HHS has nevertheless refused to exempt the territories from the guaranteed issue and community rating requirements, recognizing that, “[h]owever meritorious” the reasons for doing so might be, “HHS is not authorized to choose which provisions of the [ACA] might apply to the territories.”

But, it seems, the Supreme Court feels that is authorized to choose what provisions of the ACA should apply, on the grounds that doing so would make better policy, regardless of what the law actually requires.

This is essentially what Roberts did in the previous Obamacare ruling, in which he rewrote the individual mandate and the Medicaid portions of the law in order to make them pass constitutional muster.

In his scathing dissent, Justice Scalia noted,

Having transformed two major parts of the law, the Court today has turned its attention to a third. The Act that Congress passed makes tax credits available only on an “Exchange established by the State.”

This Court, however, concludes that this limitation would prevent the rest of the Act from working as well as hoped. So it rewrites the law to make tax credits available everywhere. We should start calling this law SCOTUScare.

… This Court’s two decisions on the Act will surely be remembered through the years. The somersaults of statutory interpretation they have performed (“penalty” means tax, “further [Medicaid] payments to the State” means only incremental Medicaid payments to the State, “established by the State” means not established by the State) will be cited by litigants endlessly, to the confusion of honest jurisprudence.

This decision is not disastrous because it “saved” Obamacare — it did no such thing: The Court gutted the law and let the Obama administration stuff it with whatever policy it thought best.

No, the ruling is a catastrophe because it establishes the principle that the president can unilaterally override the plain meaning of the law whenever he or she thinks that doing so will lead to a better outcome, one more in keeping with his or her policy goals.

As is often the case with elaborate government programs, things didn’t turn out the way that the planners expected. And, once again, the Supreme Court allowed the government to skate around both the Affordable Care Act and the law of unintended consequences.

This decision sanctifies the administration’s decision to defy Congress, circumvent the states, and flout the law. And as the authors of Obamacare knew, if you subsidize something, you’ll get more of it. Expect this ruling to stimulate more sloppy legislation, executive overreach, and subversion of the rule of law.


Daniel Bier

Daniel Bier is the editor of Anything Peaceful. He writes on issues relating to science, civil liberties, and economic freedom.

5 Reasons the FDA’s Ban on Trans Fat Is a Big Deal by Walter Olson

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The Obama administration’s Food and Drug Administration today announced a near-ban, in the making since 2013, on the use of partially hydrogenated vegetable fats (“trans fats”) in American food manufacturing.

Specifically, the FDA is knocking trans fats off the Generally Recognized as Safe (GRAS) list. This is a big deal and here are some reasons why:

1. It’s frank paternalism. Like high-calorie foods or alcoholic beverages, trans fats have marked risks when consumed in quantity over long periods, smaller risks in moderate and occasional use, and tiny risks when used in tiny quantities. The FDA intends to forbid the taking of even tiny risks, no matter how well disclosed.

2. The public doesn’t agree. A 2013 Reason-RUPE poll found majorities of all political groups felt consumers should be left free to choose on trans fats.  Even in heavily governed places like New York City and California, where the political class bulldozed through restaurant bans some years back, there was plenty of resentment.

3. The public is also perfectly capable of recognizing and acting on nutritional advances on its own. Trans fats have gone out of style and consumption has dropped by 85 percent as consumers have shunned them.

But while many products have been reformulated to omit trans fats, their versatile qualities still give them an edge in such specialty applications as frozen pizza crusts, microwave popcorn, and the sprinkles used atop cupcakes and ice cream. Food companies tried to negotiate to keep some of these uses available, especially in small quantities, but apparently mostly failed.

4. Government doesn’t always know best, nor do its friends in “public health.” The story has often been told of how dietary reformers touted trans fats from the 1950s onward as a safer alternative to animal fats and butter.

Public health activists and various levels of government hectored consumers and restaurants to embrace the new substitutes. We now know this was a bad idea: trans fats appear worse for cardiovascular health than what they replaced. And the ingredients that will replace minor uses of trans fats – tropical palm oil is one – have problems of their own.

5. Even if you never plan to consume a smidgen of trans fat ever again, note well: many public health advocates are itching for the FDA to limit allowable amounts of salt, sugar, caffeine, and so forth in food products. Many see this as their big pilot project and test case.

But when it winds up in court, don’t be surprised if some courtroom spectators show up wearing buttons with the old Sixties slogan: Keep Your Laws Off My Body.


Walter Olson

Walter Olson is a senior fellow at the Cato Institute’s Center for Constitutional Studies.

EDITORS NOTE: This post first appeared at Cato.org.

“Paid Family Leave” Is a Great Way to Hurt Women by Robert P. Murphy

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In an article in the New Republic, Lauren Sandler argues that it’s about time the United States join the ranks of all other industrialized nations and provide legally guaranteed paid leave for pregnancy or illness.

Her arguments are similar to ones employed in the minimum wage debate. Opponents say that making particular workers more expensive will lead employers (on aggregate) to hire fewer of them. Supporters reject this tack as fearmongering, going so far as to claim such measures will boost profitability, and that only callous disregard for the disadvantaged can explain the opposition.

If paid leave (or higher pay for unskilled workers) helps workers and employers, then why do progressives need government power to force these great ideas on everyone?

The United States already has unpaid family leave, with the Family and Medical Leave Act (FMLA) signed into law by President Clinton in 1993. This legislation “entitles eligible employees … to take unpaid, job-protected leave for specified family and medical reasons with continuation of group health insurance coverage under the same terms and conditions as if the employee had not taken leave.” Specifically, the FMLA grants covered employees 12 workweeks of such protection in a 12-month period, to deal with a pregnancy, personal sickness, or the care of an immediate family member. (There is a provision for 26 workweeks if the injured family member is in the military.)

But “workers’ rights” advocates want to move beyond the FMLA, in winning legally guaranteed paid leave for such absences. Currently, California, New Jersey, and Rhode Island have such policies.

The basic libertarian argument against such legislation is simple enough: no worker has a right to any particular job, just as no employer has the right to compel a person to work for him or her. In a genuine market economy based on private property and consensual relations, employers and workers are legally treated as responsible adults to work out mutually beneficial arrangements. If it’s important to many women workers that they won’t forfeit their jobs in the event of a pregnancy, then in a free and wealthy society, many firms will provide such clauses in the employment contract in order to attract qualified applicants.

For example, if a 23-year-old woman with a fresh MBA is applying to several firms for a career in the financial sector, but she has a serious boyfriend and thinks they might one day start a family, then — other things equal — she is going to highly value a clause in the employment contract that guarantees she won’t lose her job if she takes off time to have a baby. Since female employment in the traditional workforce is now so prevalent, we can expect many employers to have such provisions in in their employment contracts in order to attract qualified applicants. Women don’t have a right to such clauses, just as male hedge-fund VPs don’t have a right to year-end bonuses, but it’s standard for employment contracts to have such features.

Leaving aside philosophical and ethical considerations, let’s consider basic economics and the consequences of pregnancy- and illness-leave legislation. It is undeniable that providing even unpaid, let alone paid, leave is a constraint on employers. Other things equal, an employer does not want an employee to suddenly not show up for work for months at a time, and then expect to come back as if nothing had happened. The employer has to scramble to deal with the absence in the meantime, and furthermore doesn’t want to pour too much training into a temporary employee because the original one is legally guaranteed her (or his) old job. If the employer also has to pay out thousands of dollars to an employee who is not showing up for work, it is obviously an extra burden.

As always with such topics, the easiest way to see the trade-off is to exaggerate the proposed measure. Suppose instead of merely guaranteeing a few months of paid maternity leave, instead the state enforced a rule that said, “Any female employee who becomes pregnant can take off up to 15 years, earning half of her salary, in order to deliver and homeschool the new child.” If that were the rule, then young female employees would be ticking time bombs, and potential employers would come up with all sorts of tricks to deny hiring them or to pay them very low salaries compared to their ostensible on-the-job productivity.

Now, just because guaranteed leave, whether paid or unpaid, is an expensive constraint for employers, that doesn’t mean such policies (in moderation) are necessarily bad business practices, so long as they are adopted voluntarily. To repeat, it is entirely possible that in a genuinely free market economy, many employers would voluntarily provide such policies in order to attract the most productive workers. After all, employers allow their employees to take bathroom breaks, eat lunch, and go on vacation, even though the employees aren’t generating revenue for the firm when doing so.

However, if the state must force employers to enact such policies, then we can be pretty sure they don’t make economic sense for the firms in question. In her article, Sandler addresses this fear by writing, in reference to New Jersey’s paid leave legislation,

After then-Governor Jon Corzine signed the bill, Chris Christie promised to overturn it during his campaign against Corzine. But Christie never followed through. The reason why is quite plain: As with California, most everyone loves paid leave. A recent study from the CEPR found that businesses, many of which strenuously opposed the policy, now believe paid leave has improved productivity and employee retention, decreasing turnover costs. (emphasis added)

Well, that’s fantastic! Rather than engaging in divisive political battles, why doesn’t Sandler simply email that CEPR (Center for Economic and Policy Research) study to every employer in the 47 states that currently lack paid leave legislation? Once they see that they are flushing money down the toilet right now with high turnover costs, they will join the ranks of the truly civilized nations and offer paid leave.

The quotation from Sandler is quite telling. Certain arguments for progressive legislation rely on “externalities,” where the profit-and-loss incentives facing individual consumers or firms do not yield the “socially optimal” behavior. On this issue of family leave, the progressive argument is much weaker. Sandler and other supporters must maintain that they know better than the owners of thousands of firms how to structure their employment contracts in order to boost productivity and employee retention. What are the chances of that?

In reality, given our current level of wealth and the configuration of our labor force, it makes sense for some firms to have generous “family leave” clauses for some employees, but it is not necessarily a sensible approach in all cases. The way a free society deals with such nuanced situations is to allow employers and employees to reach mutually beneficial agreements. If the state mandates an approach that makes employment more generous to women in certain dimensions — since they are the prime beneficiaries of pregnancy leave, even if men can ostensibly use it, too — then we can expect employers to reduce the attractiveness of employment contracts offered to women in other dimensions. There is no such thing as a free lunch. Mandating paid leave will reduce hiring opportunities and base pay, especially for women. If this trade-off is something the vast majority of employees want, then that’s the outcome a free labor market would have provided without a state mandate.


Robert P. Murphy

Robert P. Murphy is senior economist with the Institute for Energy Research. He is author of Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015).

Who Should Choose? Patients and Doctors or the FDA? by Doug Bandow

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Good ideas in Congress rarely have a chance. Rep. Fred Upton (R-Mich.) is sponsoring legislation to speed drug approvals, but his initial plan was largely gutted before he introduced it last month.

Congress created the Food and Drug Administration in 1906, long before prescription drugs became such an important medical treatment. The agency became an omnibus regulatory agency, controlling everything from food to cosmetics to vitamins to pharmaceuticals. Birth defects caused by the drug Thalidomide led to the 1962 Kefauver-Harris Amendments which vastly expanded the FDA’s powers. The new controls did little to improve patient safety but dramatically slowed pharmaceutical approvals.

Those who benefit the most from drugs often complain about the cost since pills aren’t expensive to make. However, drug discovery is an uncertain process. Companies consider between 5,000 and 10,000 substances for every one that ends up in the pharmacy. Of those only one-fifth actually makes money—and must pay for the entire development, testing, and marketing processes.

As a result, the average per drug cost exceeds $1 billion, most often thought to be between $1.2 and $1.5 billion. Some estimates run more.

Naturally, the FDA insists that its expensive regulations are worth it. While the agency undoubtedly prevents some bad pharmaceuticals from getting to market, it delays or blocks far more good products.

Unfortunately, the political process encourages the agency to kill with kindness. Let a drug through which causes the slightest problem, and you can expect television special reports, awful newspaper headlines, and congressional hearings. Stop a good drug and virtually no one notices.

It took the onset of AIDS, then a death sentence, to force the FDA to speed up its glacial approval process. No one has generated equivalent pressure since. Admitted Richard Merrill, the agency’s former chief counsel:  “No FDA official has ever been publicly criticized for refusing to allow the marketing of a drug.”

By 1967 the average delay in winning approval of a new drug had risen from seven to 30 months after the passage of Kefauver-Harris. Approval time now is estimated to run as much as 20 years.

While economist Sam Peltzman figured that the number of new drugs approved dropped in half after Kefauver-Harris, there was no equivalent fall in the introduction of ineffective or unsafe pharmaceuticals. All the Congress managed to do was strain out potentially life-saving products.

After all, a company won’t make money selling a medicine that doesn’t work. And putting out something dangerous is a fiscal disaster. Observed Peltzman:  the “penalties imposed by the marketplace on sellers of ineffective drugs prior to 1962 seem to have been enough of a deterrent to have left little room for improvement by a regulatory agency.”

Alas, the FDA increases the cost of all medicines, delays the introduction of most pharmaceuticals, and prevents some from reaching the market. That means patients suffer and even die needlessly.

The bureaucracy’s unduly restrictive approach plays out in other bizarre ways. Once a drug is approved doctors may prescribe it for any purpose, but companies often refuse to go through the entire process again to win official okay for another use. Thus, it is common for AIDS, cancer, and pediatric patients to receive off-label prescriptions. However, companies cannot advertise these safe, effective, beneficial uses.

Congress has applied a few bandages over the years. One was to create a process of user fees through the Prescription Drug User Fee Act. Four economists, Tomas Philipson, Ernst Berndt, Adrian Gottschalk, and Matthew Strobeck, figured that drugmakers gained between $11 billion and $13 billion and consumers between $5 billion and $19 billion. Total life years saved ranged between 180,000 and 310,000. But lives continue to be lost because the approval process has not been accelerated further.

Criticism and pressure did lead to creation of a special FDA procedure for “Accelerated Approval” of drugs aimed at life-threatening conditions. This change, too, remains inadequate. Nature Biotechnology noted that few medicines qualified and “in recent years, FDA has been ratcheting up the requirements.”

The gravely ill seek “compassionate access” to experimental drugs. Some patients head overseas unapproved treatments are available. The Wall Street Journal reported on those suffering from Lou Gehrig’s disease who, “frustrated by the slow pace of clinical drug trials or unable to qualify, are trying to brew their own version of an experimental compound at home and testing it on themselves.”

Overall, far more people die from no drugs than from bad drugs. Most pharmaceutical problems involve doctors misprescribing or patients misusing medicines. The deadliest pre-1962 episode involved Elixir Sulfanilamide and killed 107 people. (Thalidomide caused some 10,000 birth defects, but no deaths.) Around 3500 users died from Isoproterenol, an asthmatic inhaler. Vioxx was blamed for a similar number of deaths, though the claim was disputed. Most of the more recent incidents would not have been prevented from a stricter approval process.

The death toll from agency delays is much greater. Drug analyst Dale Gieringer explained:  “The benefits of FDA regulation relative to that in foreign countries could reasonably be put at some 5,000 casualties per decade or 10,000 per decade for worst-case scenarios.  In comparison … the cost of FDA delay can be estimated at anywhere from 21,000 to 120,000 lives per decade.”

According to the Competitive Enterprise Institute, among the important medicines delayed were ancrod, beta-blockers, citicoline, ethyol, femara, glucophage, interleukin-2, navelbine, lamictal, omnicath, panorex, photofrin, prostar, rilutek, taxotere, transform, and vasoseal.

Fundamental reform is necessary. The FDA should be limited to assessing safety, with the judgment as to efficacy left to the marketplace. Moreover, the agency should be stripped of its approval monopoly. As a start drugs approved by other industrialized states should be available in America.

The FDA’s opinion also should be made advisory. Patients and their health care providers could look to private certification organizations, which today are involved in everything from building codes to electrical products to kosher food. Medical organizations already maintain pharmaceutical databases and set standards for treatments with drugs. They could move into drug testing and assessment.

No doubt, some people would make mistakes. But they do so today. With more options more people’s needs would be better met. Often there is no single correct treatment decision. Ultimately the patient’s preference should control.

Congress is arguing over regulatory minutiae when it should be debating the much more basic question: Who should decide who gets treated how? Today the answer is Uncle Sam. Tomorrow the answer should be all of us.

Doug Bandow

Doug Bandow is a senior fellow at the Cato Institute and the author of a number of books on economics and politics. He writes regularly on military non-interventionism.

Health Insurance Is Illegal by Warren C. Gibson

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Health insurance is a crime. No, I’m not using a metaphor. I’m not saying it’s a mess, though it certainly is that. I’m saying it’s illegal to offer real health insurance in America. To see why, we need to understand what real insurance is and differentiate that from what we currently have.

Real insurance

Life is risky. When we pool our risks with others through insurance policies, we reduce the financial impact of unforeseen accidents or illness or premature death in return for a premium we willingly pay. I don’t regret the money I’ve spent on auto insurance during my first 55 years of driving, even though I’ve yet to file a claim.

Insurance originated among affinity groups such as churches or labor unions, but now most insurance is provided by large firms with economies of scale, some organized for profit and some not. Through trial and error, these companies have learned to reduce the problems of adverse selection and moral hazard to manageable levels.

A key word above is unforeseen.

If some circumstance is known, it’s not a risk and therefore cannot be the subject of genuine risk-pooling insurance. That’s why, prior to Obamacare, some insurance companies insisted that applicants share information about their physical condition. Those with preexisting conditions were turned down, invited to high-risk pools, or offered policies with higher premiums and higher deductibles.

Insurers are now forbidden to reject applicants due to preexisting conditions or to charge them higher rates.

They are also forbidden from charging different rates due to different health conditions — and from offering plans that exclude certain coverage items, many of which are not “unforeseen.”

In other words, it’s illegal to offer real health insurance.

Word games

Is all this just semantics? Not at all. What currently passes for health insurance in America is really just prepaid health care — on a kind of all-you-can-consume buffet card. The system is a series of cost-shifting schemes stitched together by various special interests. There is no price transparency. The resulting overconsumption makes premiums skyrocket, and health resources get misallocated relative to genuine wants and needs.

Lessons

Some lessons here are that genuine health insurance would offer enormous cost savings to ordinary people — and genuine benefits to policyholders. These plans would encourage thrift and consumer wisdom in health care planning,  while discouraging the overconsumption that makes prepaid health care unaffordable.

At this point, critics will object that private health insurance is a market failure because the refusal of unregulated private companies to insure preexisting conditions is a serious problem that can only be remedied by government coercion. The trouble with such claims is that no one knows what a real health insurance market would generate, particularly as the pre-Obamacare regime wasn’t anything close to being free.

What might a real, free-market health plan look like?

  • People would be able to buy less expensive plans from anywhere, particularly across state lines.
  • People would be able to buy catastrophic plans (real insurance) and set aside much more in tax-deferred medical savings accounts to use on out-of-pocket care.
  • People would very likely be able to buy noncancelable, portable policies to cover all unforeseen illnesses over the policyholder’s lifetime.
  • People would be able to leave costly coverage items off their policies — such as chiropractic or mental health — so that they could enjoy more affordable premiums.
  • People would not be encouraged by the tax code to get insurance through their employer.

What about babies born with serious conditions? Parents could buy policies to cover such problems prior to conception. What about parents whose genes predispose them to produce disabled offspring? They might have to pay more.

Of course, there will always be those who cannot or do not, for one reason or another, take such precautions. There is still a huge reservoir of charitable impulses and institutions in this country that could offer assistance. And these civil society organizations would be far more robust in a freer health care market.

The enemy of the good

Are these perfect solutions? By no means. Perfection is not possible, but market solutions compare very favorably to government solutions, especially over longer periods. Obamacare will continue to bring us unaccountable bureaucracies, shortages, rationing, discouraged doctors, and more.

Some imagine that prior to Obamacare, we had a free-market health insurance system, but the system was already severely hobbled by restrictions.

To name a few:

  • It was illegal to offer policies across state lines, which suppressed choices and increased prices, essentially cartelizing health insurance by state.
  • Employers were (and still are) given a tax break for providing health insurance (but not auto insurance) to their employees, reducing the incentive for covered employees to economize on health care while driving up prices for individual buyers. People stayed locked in jobs out of fear of losing health policies.
  • State regulators forbade policies that excluded certain coverage items, even if policyholders were amenable to such plans.
  • Many states made it illegal to price discriminate based on health status.
  • The law forbade associated health plans, which would allow organizations like churches or civic groups to pool risk and offer alternatives.
  • Medicaid and Medicare made up half of the health care system.

Of course, Obamacare fixed none of these problems.

Many voices are calling for the repeal of Obamacare, but few of those voices are offering the only solution that will work in the long term: complete separation of state and health care. That means no insurance regulation, no medical licensing, and ultimately, the abolition of Medicare and Medicaid, which threaten to wash future federal budgets in a sea of red ink.

Meanwhile, anything resembling real health insurance is illegal. And if you tried to offer it, they might throw you in jail.

Warren C. Gibson

Warren Gibson teaches engineering at Santa Clara University and economics at San Jose State University.

Buffaloed by Obamacare’s Hidden Taxes

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Obamacare’s costs are starting to show by D.W. MACKENZIE:

Someone at Buffalo Wild Wings decided to make the costs of the so-called Affordable Care Act (ACA) explicit in the restaurant’s register receipts. An estimated ACA cost of 2 percent was charged to each paying customer.

BW3’s customers complained. Apparently, they’d rather keep these costs hidden. But hiding costs won’t make Obamacare’s higher prices go away.

Adding the cost of a specific government program to a receipt is unusual. Normally, the only tax itemized on register tapes is sales tax — but these are a fraction of the true costs of governmental activity. There are, in fact, too many different government programs to list on each register receipt. Because the price of regulation is usually built into the prices of goods and services, we tend to pay for regulatory costs unwittingly.

Obama’s “Affordable” Care Act imposes regulations, taxes, and subsidies as a means of income redistribution. As usual, the goal is to tax and regulate higher-income people to subsidize those with lower incomes — but that’s never the way things work out.

Real people do not simply pay taxes and regulatory costs as required by written laws. Everyone tries to avoid taxes by whatever means are available. Tax avoidance usually stems from bargaining over prices in markets. Sellers push for higher prices, and buyers push for lower prices.

Sellers have costs to cover: labor, capital, and taxes. It is a simple fact of economics that when an entrepreneur’s taxes rise, he or she will pass part of that additional cost on to customers.

Regulations are de-facto taxes. There is no economic difference between taxing money from someone to fund some activity and a regulatory requirement to achieve the same goal. The ACA is a complex set of taxes.

How do entrepreneurs respond to ACA taxes? The same way they respond to all taxes, explicit or regulatory: by raising the price of whatever they sell.

There is an inescapable fact of taxation: tax burdens are always shared. Taxes charged to upper-income earners for redistribution are in some measure always redistributed to those with lower incomes through price increases.

While ACA benefits have been touted as “free” to lower-income recipients, this proposition is false — and impossible. Somebody always pays for insurance, or any other good. Goods that seem to be paid for by government only appear to be free because their costs are hidden or obscured. Costs of government programs, like the ACA, are just added into the total costs of taxation, and the costs of taxation are partly factored into the prices of all goods.

Taxpayers cannot buy the same amount of goods when final tax-adjusted prices go up. Economists call the effect of taxes on consumer purchases the tax wedge, because taxes drive a wedge between what consumers pay and what entrepreneurs receive. Taxes make goods more expensive for consumers and less profitable for entrepreneurs.

The explicit 2 percent ACA surcharge at Buffalo Wild Wings may or may not have been intended as permanent. The restaurant chain’s executives have already cancelled the policy after customers reacted negatively. But there is a lesson to be learned from the surcharge. Government programs have the superficial appearance of being free, but they never are.

Government’s lack of financial transparency often leads to an ironic outcome: things that appear to be government gifts end up costing more. Why? Because the public sector’s hidden costs mean less cost control in the public sector.

Private enterprises make costs clear with prices. Prices don’t itemize each cost, but because costs are more easily perceived in the private sector, people make greater efforts to control costs. Some find the explicit nature of costs in the private sector unpleasant. Conversely, the fantasy of a free lunch from the state does have a certain emotional appeal. But the inability of most people to perceive the costs of government makes it almost certain that these costs will be higher, compared to the efficiency the private sector can achieve.

As Buffalo Wild Wings made clear, the ACA is just another example of a government program that makes a false promise of free benefits. Rational economic analysis tells us that there ain’t no such thing as a free lunch, yet politicians continue to use that fantasy for political gain.

Let’s abandon the myth of gifts from government. Every action has an economic cost, public or private.

ABOUT D.W. MACKENZIE

D. W. MacKenzie is an assistant professor of economics at Carroll College in Helena, Montana.

8 Goofs in Jonathan Gruber’s Health Care Reform Book

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This Obamacare architect’s propaganda piece is a comic of errors by MATT PALUMBO:

In one of life’s bitter ironies, I recently found a book by Jonathan Gruber in the bin of a bookstore’s going-out-of-business sale. It’s called Health Care Reform: What It Is, Why It’s Necessary, How It Works. Interestingly, the book is a comic, which made it a quick read. It’s just the sort of thing that omniscient academics write to persuade ordinary people that their big plans are worth pursuing.

Health Care Reform: What It Is, Why It’s Necessary, How It Works

In case you’ve forgotten — and to compound the irony — Gruber is the Obamacare architect who received negative media attention recently for some controversial comments about the stupidity of the average American voter. In Health Care Reform, Gruber focuses mainly on two topics: an attempted diagnosis of the American health care system, and how the Affordable Care Act (the ACA, or Obamacare) will solve them. I could write a PhD thesis on the myriad fallacies, half-truths, and myths propounded throughout the book. But instead, let’s explore eight of Gruber’s major errors.

Error 1: The mandate forcing individuals to buy health insurance is just like forcing people to buy car insurance, which nobody questions.

This is a disanalogy — and an important one. A person has to purchase car insurance only if he or she gets a car. The individual health insurance mandate forces one to purchase health insurance no matter what. Moreover, what all states but three require for cars is liability insurance, which covers accidents that cause property damage and/or bodily injury. Technically speaking, you’re only required to have insurance to cover damages you might impose on others. If an accident is my fault, liability insurance covers the other individual’s expenses, not my own, and vice versa.

By contrast, if the other driver and I each had collision insurance, we would both be covered for vehicle damage regardless of who was at fault. If collision insurance were mandated, the comparison to health insurance might be apt, because, as with health insurance, collision covers damage to oneself. But no states require collision insurance.

Gruber wants to compare health insurance to car insurance primarily because (1) he wants you to find the mandate unobjectionable, and (2) he wants you to think of the young uninsured (those out of the risk pool) as being sort of like uninsured drivers — people who impose costs on others due to accidents.

But not only is the comparison inapt, Gruber’s real goal is to transfer resources from those least likely to need care (younger, poorer people) to those most likely to need care (older, richer people). The only way mandating health insurance could be like mandating liability car insurance is in preventing the uninsured from shifting the costs of emergent care thanks to federal law. We’ll discuss that as a separate error, next.

Error 2: The emergency room loophole is responsible for increases in health insurance premiums.

In 1986, Reagan passed the Emergency Medical Treatment and Active Labor Act, one provision of which was that hospitals couldn’t reject emergency care to anyone regardless of their ability to pay. This act created the “emergency room loophole,” which allows many uninsured individuals to receive care without paying.

The emergency room loophole does, indeed, increase premiums. There is no free lunch. The uninsured who use emergency rooms can’t pay the bills, and the costs are thus passed on to the insured. So why do I consider this point an error? Because Gruber overstates its role in increasing premiums. “Ever wonder why your insurance premiums keep going up?” he asks rhetorically, as if this loophole is among the primary reasons for premium inflation.

The reality is, spending on emergency rooms (for both the uninsured and the insured) only accounts forroughly 2 percent of all health care spending. Claiming that health insurance premiums keep rising due to something that accounts for 2 percent of health care expenses is like attributing the high price of Starbucks drinks to the cost of their paper cups.

Error 3: Medical bills are the No.1 cause of individual bankruptcies.

Gruber doesn’t include a single reference in the book, so it’s hard to know where he’s getting his information. Those lamenting the problem of medical bankruptcy almost always rely on a 2007 studyconducted by David Himmelstein, Elizabeth Warren, and two other researchers. The authors offered the shocking conclusion that 62 percent of all bankruptcies are due to medical costs.

But in the same study, the authors also claimed that 78 percent of those who went bankrupt actually had insurance, so it would be strange for Gruber to claim the ACA would solve this problem. While it would be unfair to conclude definitively that Gruber relied on this study for his uncited claims, it is one of the only studies I am aware of that could support his claim.

More troublingly, perhaps, a bankruptcy study by the Department of Justice — which had a sample size five times larger than Himmelstein and Warren’s study — found that 54 percent of bankruptcies have no medical debt, and 90 percent have debt under $5,000. A handful of studies that contradict Himmelstein and Warren’s findings include studies by Aparna Mathur at the American Enterprise Institute; David Dranove and Michael Millenson of Northwestern University; Scott Fay, Erik Hurst, and Michelle White (at the universities of Florida, Chicago, and San Diego, respectively); and David Gross of Compass Lexecon and Nicholas Souleles of the University of Pennsylvania.

Why are Himmelstein and Warren’s findings so radically different? Aside from the fact that their study was funded by an organization called Physicians for a National Health Program, the study was incredibly liberal about what it defined as a medical bankruptcy. The study considered any bankruptcy with any amount of medical debt as a medical bankruptcy. Declare bankruptcy with $100,000 in credit card debt and $5 in medical debt? That’s a medical bankruptcy, of course. In fact, only 27 percent of those surveyed in the study had unreimbursed medical debt exceeding $1,000 in the two years prior to declaring bankruptcy.

David Dranove and Michael L. Millenson at the Kellogg School of Management reexamined the Himmelstein and Warren study and could only find a causal relationship between medical bills and bankruptcy in 17 percent of the cases surveyed. By contrast, in Canada’s socialized medical system, the percentage of bankruptcies due to medical expenses is estimated at between 7.1 percent and 14.3 percent. One wonders if the Himmelstein and Warren study was designed to generate a narrative that self-insurance (going uninsured) causes widespread bankruptcy.

Error 4: 20,000 people die each year because they don’t have the insurance to pay for treatment.

If the study this estimate was based on were a person, it could legally buy a beer at a bar. Twenty-one years ago, the American Medical Association released a study estimating the mortality rate of the uninsured to be 25 percent higher than that of the insured. Thus, calculating how many die each year due to a lack of insurance is determined by the number of insured and extrapolating from there how many would die in a given year with the knowledge that they’re 25 percent more likely to die than an insured person.

Even assuming that the 25 percent statistic holds true today, not all insurance is equal. As Gruber notes on page 74 of his book, the ACA is the biggest expansion of public insurance since the creation of Medicare and Medicaid in 1965, as 11 million Americans will be added to Medicaid because of the ACA. So how does the health of the uninsured compare with those on Medicaid? Quite similarly. As indicated by the results from a two-year study in Oregon that looked at the health outcomes of previously uninsured individuals who gained access to Medicaid, Medicaid “generated no significant improvement in measured physical health outcomes.” Medicaid is more of a financial cushion than anything else.

So with our faith in the AMA study intact, all that would happen is a shift in deaths from the “uninsured” to the “publicly insured.” But the figure is still dubious at best. Those who are uninsured could also suffer from various mortality-increasing traits that the insured lack. As Megan McArdle elaborates on these lurking third variables,

Some of the differences we know about: the uninsured are poorer, more likely to be unemployed or marginally employed, and to be single, and to be immigrants, and so forth. And being poor, and unemployed, and from another country, are all themselves correlated with dying sooner.

Error 5: The largest uninsured group is the working poor.

Before Obamacare, had you ever heard that there are 45 million uninsured Americans? It’s baloney. In 2006, 17 million of the uninsured had incomes above $50,000 a year, and eight million of those earned more than $75,000 a year. According to one estimate from 2009, between 12 million and 14 million were eligible for government assistance but simply hadn’t signed up. Another estimate from the same source notes that between 9 million and 10 million of the uninsured are not American citizens. According to the Centers for Disease Control and Prevention, slightly fewer than 8 million of the uninsured are aged 18–24, the group that requires the least amount of medical care and has an average annual income of slightly more than $30,000.

Thus, the largest group of uninsured is not the working poor. It’s the middle class, upper middle class, illegal immigrants, and the young. The working poor who are uninsured are often eligible for assistance but don’t take advantage of it. I recognize that some of these numbers may seem somewhat outdated (the sources for all of them can be found here), but remember: we’re taking account of the erroneous ways Gruber and Obamacare advocates sold the ACA to “stupid” Americans.

Error 6: The ACA will have no impact on premiums in the short term, according to the CBO.

Interesting that there’s no mention of what will happen in the long run. Regardless, not only have there already been premium increases, one widely reported consequence of the ACA has been increases in deductibles. If I told you that I could offer you an insurance plan for a dollar a year, it would seem like a great deal. If I offered you a plan for a dollar a year with a $1 million deductible, you might not think it’s such a great deal.

A report from PricewaterhouseCoopers’ Health Research Institute found that the average cost of a plan sold on the ACA’s exchanges was 4 percent less than the average for an employer-provided plan with similar benefits ($5,844 vs. $6,119), but the deductibles for the ACA plans were 42 percent higher ($5,081 vs. $3,589). The ACA is thus able to swap one form of sticker shock (high premiums) for another (high deductibles). Let us not forget that the ACA exchanges receive federal subsidies. Someone has to pay for those, too.

Error 7: A pay-for-performance model in health care would increase quality and reduce costs.

This proposal seems like common sense in theory, but it’s questionable in reality. Many conservatives and libertarians want a similar model for education, so some might be sympathetic to this aspect of Gruber’s proposal. But there is enormous difficulty in determining how we are to rank doctors.

People respond to incentives, but sometimes these incentives are perverse. Take the example of New York, which introduced a system of “scorecards” to rank cardiologists by the mortality rates of their patients who received coronary angioplasty, a procedure to treat heart disease. Doctors paid attention to their scorecards, and they obviously could increase their ratings by performing more effective surgeries. But as Charles Wheelan noted in his book Naked Statistics, there was another way to improve your scorecard: refuse surgeries on the sickest patients, or in other words, those most likely to die even with care. Wheelan cites a survey of cardiologists regarding the scorecards, where 83 percent stated that due to public mortality statistics, “some patients who might benefit from angioplasty might not receive the procedure.”

Error 8: The ACA “allows you to keep your current policy if you like it… even if it doesn’t meet minimum standards.”

What, does this guy think we’re stupid or something?

ABOUT MATT PALUMBO

Matt Palumbo is the author of The Conscience of a Young Conservative and In Defense of Classical Liberalism.