On the National Education Foundation's web site it lays out a numbered list of priorities on its Federal Policy Guide, presumably an ordered list of educational legislation priorities for Representatives and Senators to refer to in judging whether their votes will be supported by the powerful union. One would think, though, that this represents, too, an ordered list of what the NEA sees as the most pressing issues in education reform are, with the general public also part of the intended audience in improving America's public education system.

Given that, one is not surprised to see that ideas like improving pre-K and early education, revitalizing elementary and high schools and increasing graduation rates top the list. Of the thirteen core issues only 3 or 4 could be characterized as tangentially being even indirectly related to teacher salary or collective bargaining for better contracts for teachers. Only issue #7 on a list of 13, "Support All School Staff, Vital Members of the Team" seems to be dedicated to the issue of compensation for education personnel directly, and does so in the context of discussing how the need is to make sure that not just teachers are compensated as well as they should be.

To be fair, on their main site's "Issues and Actions" page, "Professional Pay" does rate as one of five issues in the NEA's "Current Focus," alongside overall Education funding. However, if asked on the record, one assumes the NEA's position is that improving educational outcomes for children trump ancillary goals like increasing the Union's power to extract favorable treatment from legislators, and that goals like increasing teacher pay are meant to make sure that teacher's are compensated fairly so that competent individuals are attracted and retained as teachers. Basically, teacher pay matters because these are the people teaching your kids, not because how good a union contract is matters in and of itself.

Bizarre, then, that you can find in a story about the NEA playing political hardball with a Chicago pol that this local tactic is reflected by national leadership. The story references a speech given by retiring NEA exec Bob Chanin to the 2008 NEA annual conference where he explicitly places all goals related to educating children as subordinate to increasing the amount of money and bargaining power that the NEA can accumulate:

Despite what some among us would like to believe it is not because of our creative ideas. It is not because of the merit of our positions. It is not because we care about children and it is not because we have a vision of a great public school for every child. NEA and its affiliates are effective advocates because we have power.

And we have power because there are more than 3.2 million people who are willing to pay us hundreds of millions of dollars in dues each year, because they believe that we are the unions that can most effectively represent them, the unions that can protect their rights and advance their interests as education employees.

This is not to say that the concern of NEA and its affiliates with closing achievement gaps, reducing dropout rates, improving teacher quality and the like are unimportant or inappropriate. To the contrary. These are the goals that guide the work we do. But they need not and must not be achieved at the expense of due process, employee rights and collective bargaining. That simply is too high a price to pay.

That's a somewhat shocking admission for the NEA to make; these guys aren't mining coal or playing Major League Baseball. While every union's goal (as a sort of labor cartel) is to manipulate the market by coordinating the price at which labor will be supplied and thereby get more money for the same work by its members, the teachers union sells itself as nice. If your representatives craft a piece of education "reform" legislation in such a way that the NEA loves it the NEA would have you believe that this bill will do good at improving education in America: the NEA is concerned about teacher's pay, but it is also a group that advocates for improving educational outcome.

Strange, though, that a group that claims to care about educational outcomes would say that while those goals guide their efforts that reform "must not be achieved at the expense of due process, employee rights and collective bargaining." And of course, that the NEA's advocacy is effective not because of something as inane as having good ideas and a soapbox, but rather it stems from power, which stems directly from hundreds of millions of dollars in union dues.

So when education reformers not affiliated with the NEA suggest things like allowing competition between schools, giving parents the choice between their local public school or a voucher to be used to pay for tuition at a charter school or private school that does not employ Union members, or when a disinterested social scientist questions just how effective reducing class size from 25 to 15 is at improving outcomes, or when some other reformer suggests incentivizing teacher pay based on performance as measured by standardized tests, you have to question whether the NEA is following the creed that is embodied by its website or by a speech at their annual meeting that got a round of enthusiastic applause. If an effective education reform threatens to decrease the number of unionized teachers and therefore the amount of dues the NEA collects and therefore its power, does the NEA oppose that policy because it would decrease its collective bargaining power? If they do, do they say so openly or do they try to come up with confusing, bogus studies that come to opposite conclusions to muddy the waters and seem like they still care about the children.

If it is the latter, then it wouldn't really matter whether allowing parents who live in an area where their children would be forced to attend a failing public school to get a voucher to pay for private, non-union-supporting education was a great idea with the potential to drastically improve educational outcomes, the NEA would oppose it. The NEA's policy page on charter schools, which are publicly funded schools that are run without all the regulations of traditional public schools and sometimes outside the scope of traditional regulators, is instructive. While the NEA does not come out and demonize charter schools, it says that charter schools can only be supported if they fulfill a number of criteria:

• A charter should be granted only if the proposed school intends to offer an educational experience that is qualitatively different from what is available in traditional public schools. [In other words, a mere quantitative improvement in perforamance using non-union administrators and teachers would not be acceptable]


• Charter school funding should not disproportionately divert resources from traditional public schools. [Charter schools can't come to receive more than a small portion of public education dollars even if they do a better job at teaching children than traditional (NEA dominated) public schools]


• Local school boards should have the authority to grant or deny charter applications; the process should be open to the public, and applicants should have the right to appeal to a state agency decisions to deny or revoke a charter.[We should be able to apply political pressure against charter schools at either the local level or the state level, wherever we have more power]


• Charter schools should be subject to the same public sector labor relations statutes as traditional public schools, and charter school employees should have the same collective bargaining rights as their counterparts in traditional public schools.[Charter schools are really only good if they give more money to the NEA and function exactly like our failing public schools]

So while the NEA's position on Charter Schools seems superficially nuanced and appears to be guided only by a primary mission of improving outcomes--we tentatively support the idea of Charter Schools if they are implemented in a diligent fashion-- if you look at the fine print their support for Charter Schools hinges on their teachers and administrators being unionized. Increased power trumps even the ideological goals of the organization. Imagine if a large longitudinal study came out that showed that a key feature of successful charter schools was that teachers and administrators could be hired and fired much more easily than in a school with a collective bargaining agreement the NEA signed off on; the NEA's instinctive reaction would be vehement opposition to the validity of the data and if it came to it to legislation based on its conclusions. Such data and conclusions threaten its very rationale for existence--that well-paid and content teachers are needed to get good results and that collective bargaining and unionized teachers are required to attract and keep those teachers--and therefore the NEA, as it admits when the target audience is not the public, cares about improving education, but improving education must be prioritized below increasing the bargaining power and legislative influence of the union.

The NEA's political allies are mostly Democrats, but Republicans are far from being innocent when it comes to taking money from this union in exchange for compromising on key aspects of educational reform that would demand that, like in every private sector industry, that teacher's jobs and pay are related to their competence and performance, not how long they've been in the same classroom. Both parties bow to this powerful lobby: the Bush Administration's No Child Left Behind Act was full of concessions to the NEA and while the Union did not support many of the parts of the original bill that would attempt to add competitive pressure to public education outcomes in practice the NEA successfully watered down the changes it sought to implement in teacher incentives and objective measurement of performance of teaching basic skills. When you think about education reforms in the future think about who you're talking to and if their information you have or that you hear came from a source that was ultimately parroting the conventional wisdom of the NEA-- for instance the dogma that small class size is crucial certainly creates demand for more teachers but it's not clear it improves outcomes universally. If so consider that they support educational reforms that help educate America's children... so long as that policy happens to involve an increase in the number or salary of unionized teachers.

Labels: ballyhoo, economics, politics

When the popular narrative of our 44th President coalesces, it will no doubt start with the following: President Obama "inherited" the worst financial crisis since the Great Depression from President Bush and that much of the increase in Federal spending that ensued was an attempt to inject capital into the economy to jump-start economic growth. What even happens in reality has yet to unfold, let alone how it will be remembered in the public consciousness, and issues like whether the stimulus was a Keynesian policy (let alone whether it was a good decision or if the stimulus funds were spent wisely) or whether it was justified by newer theories of economics, like those that emphasize the importance of irrational behavior of market participants, emphasizing how our "Animal Spirits" can function to impel us foolishly towards the cliff, en masse. While I quibble with the idea that anyone who undertakes the arduous, lifelong project of becoming a successful politician and then knowingly seeks and wins every phase of an arduous, nearly two year process to become President can "inherit" anything, and I would argue that no single person or even a single President was responsible for the economic crisis, one thing that seems certain is that Obama will be judged largely for how he fixes the economy, both in terms of spurring it to recovery and in preventing such "bubbles" from rocking the foundations of our economy ever again.

Americans are a fickle bunch, as evidenced by the fact that they seem to blame or credit Presidents for macroeconomic events that often had little or nothing to do with their fiscal policies (did Herbert Hoover cause the Depression in his 10 months in office before the market crashed? Did Bill Clinton cause the internet to cause a massive expansion in productivity and wealth? Did George W. Bush cause investors to overestimate just how productive and wealthy the internet would make us?) They also give answers to pollsters that at best would be described as confused, if not indicative of societal cognitive dissonance: 63% of Americans like the idea of expanding health-care to those who can't afford it, but only 28% are willing to pay higher taxes to achieve that goal. It may be what the polls say is wanted, but it is not a very brave or prudent policy stance to say that you favor free lunches, unfortunately.

That seems to be what we are being promised, however. Engaging in fraudulent "creative accounting" to deceive the public into thinking your organization is fiscally solvent when it's not or running an elaborate, long-term billion dollar Ponzi scheme are infuriating crimes when done by corporate types like the guys at Enron or Bernie Madoff, but apparently they are an acceptable way to attempt to buy votes when they are done by elected officials in Washington. Giving the very high quality medical care received by most Americans who have health insurance to the millions of people who currently only get health-care when they are so sick they have to go the emergency room will be very, very costly. The numbers given to the public about what that cost will be are huge, but even still are almost certainly underestimates of the actual cost, both because if an accurate, objective assessment of the cost was given the bill would die but also if you look historically at Medicare and Medicaid, long-term estimates of those costs were off by nearly an order of magnitude. As I mentioned, the government has created several Ponzi schemes, namely Medicare and Social Security: a relatively small payroll tax on the relatively small number of workers under 65 cannot pay for even a fraction of the costly health benefits and direct cash payments to all of the elderly now, let alone as the demographics change so that the ratio of elderly to working age people shrinks and the elderly live longer and collect more and more in benefits. This is absurd, and anyone who knows the key variables--the amount we owe, what we take in, the number of projected workers and retirees-- would recognize that it's a Ponzi scheme and the only question is when did people who continue to participate in the system turn from the winners who got in on the Ponzi scheme early to the pigeons who don't get back anything they pay. I certainly have no expectation that the money that comes out of my paycheck for Social Security or Medicare is money that is being set aside for me somewhere that I will someday see again and anyone my age who believes that is a fool.

And "creative accounting," I mean, jeez, we're told this is "deficit neutral" even though a key feature of the first ten years of the programs is that the taxes run for all 10 years but the benefits only start after 4 years. Despite having all of the general qualities of these other massively indebted social programs that are huge, failing Ponzi schemes we're supposed to believe this thing won't add a dime to the debt. So much of what the Government does now that has been developed as the Federal Government grew exponentially in the 20th Century is to function as a sort of the world's most massive charity that gives out cash to promote specific social goals and the interests of small but politically influential groups, except its "donors" don't give by choice, they can't choose how much they give and they can go to jail if they don't pay what they're told.

And for some time we got away with it. Aside from a one year respite in the Clinton Administration we've accumulated debt continuously since the Roosevelt Administration due to bipartisan,non-stop government social engineering and vote buying. This "charity" likes policies that are politically popular in their results (Social Security recipients like getting checks) but doesn't like paying for the stuff it gives away (those recipients would dislike cuts in the size of their checks and workers would dislike a payroll tax hike.) It was a looming problem, but economic growth kept pace, give or take, with entitlement spending and debt growth and meant that while our debt was getting bigger our creditworthiness was never really becoming more questionable. Things have changed, quickly.

Debt as a fraction of annual GDP stayed under 2/3, and generally was much lower, from when we were still paying down all those WWII war bonds in the early 1950s until last year. Now we're on pace to go to over 100% before Obama leaves office. It's unprecedented and staggering to comprehend the magnitude of the change. At the start of the 90s the debt was a little more than $3 trillion, total. A dozen years later in 2002 debt had doubled to $6 trillion. By the time Obama took office, in the midst of the financial crisis, at the start of 2009 another doubling had taken place this time in less than 7 years as debt had climbed to about $12 trillion. By the end of Obama's first term we'll hit 100% of GDP at $16.5 trillion and by the end of the Obama's second term or the first term of the next President debt is projected to be somewhere at or above $20 trillion.

A lot of the deficit spending that took place during and immediately after the period of chaotic financial instability when huge Wall Street firms were flaming out, being bailed out or having shotgun weddings to keep from going under was meant to prevent an economic meltdown (Bush's TARP) and to inject capital into the broader economy to try to insulate main street from the massive beating Wall street had just taken (Obama's stimulus). As time has gone on, despite an unprecedented, very destabilizing amount of debt, a good enough reason for deficit spending has been watered down from making sure the economy doesn't implode to making sure Americans don't have to deal with the consequences of the bad fundamentals in the economy to just generally pursuing liberal social and political goals. The consequences of the recession would be painful: the big three auto makers and other inefficient companies would go out of business and those people would have to try to find new jobs, just like the people who are being laid off from companies that are downsizing to try to cut costs. The government seems intent on not allowing permanent reallocation of capital to more productive uses (in other words to let the market figure out if renewable energy is actually a profitable thing for Americans to spend their time working on in the 21st century, and if not, what is) since it will be painful for those who lose their jobs and more importantly it would be politically unpopular.

We've essentially nationalized two unprofitable buggy-whip auto manufacturers, we provided a subsidy to those companies and consumers by hastening people's decision to buy cars with "Cash for Clunkers", and now we're trying to offer palliative care to make sure nobody suffers adverse consequences from a disaster with seemingly interminable unemployment benefits, Obamacare and changing the rules so Big Labor can make unions bigger. And we also want to pay for "green jobs" the market didn't demand and increase the cost of energy for environmental reasons. The plan to terraform Mars will be unveiled any day.

There's a problem or two, though. (Surprising.) A seemingly completely political obedient Federal Reserve, as opposed to acting independent of political goals and serving as a guardian of the strength of the U.S.'s currency, is irresponsibly both printing huge sums of money and keeping its lending rates rates very, very low, seemingly at a level that will keep market interest rates artificially low, apparently thinking it will know exactly when to flip off the switch on the printing press when there's just enough dollars chasing just enough goods. What are we doing? A few very shallow economic indicators look positive, with the Dow now back over 10,000 and GDP growth having gone positive in the 3rd quarter. But virtually all that GDP growth was due to increased productivity of people who were already employed, as businesses trimmed the fat and got more output from less labor as they fired presumably the least cost-effective portion of their work-force, capital investment was not particularly robust--nobody's out there building factories or buying huge new equipment to expand their business--and clearly employers weren't keen on taking on new workers as unemployment has now gone over 10%. This when at the beginning of the year unemployment was around 6% and Obama laid out 8% as a benchmark for success of the stimulus. Perhaps he should put himself in a business owner's shoes for a second: the government might raise my personal income taxes and take away more of the profits I make, I may be forced to either provide health-insurance that will cost a lot more than it does now for any and all employees I have or pay a penalty (or both) and I don't know what my energy costs will be, but oil will likely not be cheap and electricity could go up by a little or a lot. If you were facing all those uncertainties do you think your mindset would be "I see an opportunity here" or "It's time to hunker down and try to keep what I have?" Do you think you'd be expanding and creating jobs?

A few tax hikes will hit: the Bush tax cuts will "expire" (as if only tax increases count as permanent changes to tax rate) and the capital gains tax on the wealthy will go up significantly (up a third from 15 to 20%) but with the weak economy a set of tax hikes that make our tax system ever more progressive and seek to raise revenues from capital gains will likely do little to raise revenues to a level that makes a big dent in future deficits. This fiscal policy will also likely end up working completely at cross purposes to the goal of our expansionary (and inflationary) monetary policy as tax hikes discourage both labor and investment at the margins, and if the wealthy are given an additional 5.4% surtax on both income and capital gains to fund Obamacare if it passes, this effect could be significant. One might say well that surtax will effect only a very small minority of the public, which is true, but generally it is the wealthy who have the ability to give people jobs. Is anybody thinking about it like this: if that tax passes and the rate of capital gains tax on those who have lots of money to invest increases from 15% to 25.4% then risky investments like decisions to throw money behind an idea for a new small business or to invest in a small business that seems poised to grow will need need to be something like 10% more profitable per unit of risk to make worthwhile the kind of capital investment that you know, creates jobs.

So, what could be the worst outcome here? Stagflation and implementation of a more European panel of social policies, meaning permanently higher rates of taxation, lower rates of GDP growth and a higher "natural" rate of unemployment? That would seem to be the best case scenario. However, if real economic recovery does start to come, or even if it does not, the combination of drastically increasing the money supply along with increasing the amount of government borrowing, which could crowd out whatever amount of private demand for loans there is, could mean that inflationary pressure and aggregate demand for loans could cause interest rates to rise dramatically. A frightening set of possibilities appear to be taking shape: if you're feeling conspiratorial perhaps the Obama Administration has figured out that the most realistic way for the Federal government to ever get out from under its tremendous debt (which is mostly held by foreigners and which will not involve a very politically unpopular policy combination of increased taxes and massive cuts in entitlement spending) is to simply devalue the dollar so much that our $15 trillion dollar debt that was worth $10 trillion euros in 2009 can go to 20 trillion nominal dollars in 2015 at which point it's worth $8 trillion euros, and similarly devalued against all other major currencies; in real terms the debt has gone down! So too, of course, has the net worth of everyone who has a bank account with dollars in it or owns dollar denominated assets. Buy gold. Hell, buy real estate.

More realistically and less out on the fringe is the idea that Obama and Congressional Democrats simply are ignoring or prioritizing as less important than systemic reforms that can only be enacted during some sort of societal crisis the fact that a few positive economic indicators may mask a reality that is far more dire than they believe. They may also fail to believe some of the following, which of course, I might be wrong about: that the costs of their social policies are far greater than they believe, that the "bold, persistent experimentation" that their agenda embodies has put a large amount of uncertainty into the business community at large which will hurt GDP growth and delay a sustained recovery, and that the combined effect of trying to put ever more goodies on the national credit card, proposing new taxes which may or may not come to be and doing so while the government's cash flow dries up means that the the figurative repo man is coming for the car.

The irony here is that the Obama Administration's attempts to provide stability in the life of the individual where you're guaranteed ever more just for being alive (at the cost of ever more personal and economic freedom) are so expensive to the national treasury and have unbalanced our books to such an extent that we could wind up doing severe damage to the creditworthiness of the country, the dollar could mirror the fate of the Yen in the 80s and 90s or worse suffering damage that would destroy vast amounts of American wealth and could end the reign of the dollar as the de facto global currency, and consequently could knock the United States off its pedestal as by far the most important economy in the world. Ours may be a fate like that of the British Empire at the end of World War II, except that unlike the decline in their economic and military supremacy, ours will not come from having made very important and noble decisions: to borrow exorbitant sums of money to destroy Nazi Germany and abandoning its policy of colonizing and exploiting the resources of foreign lands. Our debt will not be from having killed Hitler's empire, it will be from decades of being unwilling to be responsible and pay for the things we want in our domestic policy, and the end of American exceptionalism, unlike the end of British exceptionalism, will have been both deliberate and avoidable.

That's a hell of a double dip. Are you willing to risk the (already shrinking) value of your savings account, the #1 spot in global geopolitics and economics, the solvency of our government, and another sustained period of economic contraction so that we can have Obamacare and Cap and Trade?

Labels: ballyhoo, economics, obama, philosophy, politics

Harry Reid announced yesterday that the "Public Option" was back in play in the Senate, but his apparent ace in the hole (pardon the awful Nevada gambling puns) was that states could opt out of the public option if they so chose. What wasn't outlined was how states would opt in or out (would it be an executive branch decision? Would opting out or in be a permanent decision or could it be reversed if the state's government later changed hands to elected officials with a mandate for changing the state's status? Could you opt out after you opted in?) but a much more fundamental problem makes me question how this plan is in anyway practicable. First, to dispatch with the obvious, the "opt out" plan is a clear political triangulation, which might not work anyway, meant to satiate progressives who think the public option is the whole point but to give political cover to blue dogs who, if the opt out plan actually made sense might be able to sell it at home as having gotten health-care but having not forced the most heavy handed government regulation on their constituents.

The problem, though, is this thing called the Constitution. Specifically the very first clause of Article 1, Section 8 which gives the Congress power to levy taxes and excises, but which specifies that "all Duties, Imposts and Excises shall be uniform throughout the United States."

I'm not sure that the details of how the plan will be paid for have been laid out in their final form, but the gist is a penalty for those who can afford insurance but don't get it (which Obama argues is not a tax--hard to follow his logic there) but much more importantly a tax of at least 8% on medium to large employers who provide health-care to all their employees and then an alternative tax that will cost presumably approximately the same as paying for employee's health-care for employers who don't. There will also probably be some sort of tax incentives and penalties for small business owners, too, and there might also be other taxes like something of a luxury tax on "Cadillac" health plans that provide too good of coverage and cost too much.

It's hard to understand how states could allow their citizens to opt out of these taxes; I'm no lawyer but it seems like a pretty clear breach of the aforementioned clause of Article 1 Section 8 to not have these taxes not apply uniformly to all the states, whether they've opted out or not. Given that, if the "opt out" option is that your constituents pay exactly the same amount of taxes to fund federal health care as they would whether you've opted in or out, and the only difference is whether those constituents are eligible for Federal largess which is being paid for out of (in theory) the taxes that they're paying anyways, it seems pretty implausible that even the most live-free-or-die, libertarian polity would support its government hamstringing their state relative to all others by sending tax dollars out of the state to subsidize all the other states' ability to offer "free" health-care, and even the most principled, Federalist state government would be able to justify a policy that would be so costly to state residents.

The opt out plan is basically like an offer from one of your friends who has season tickets for a baseball team to let you and some other friends split the cost and then each get a share of the tickets. Except your friend is forcing you to pay for the tickets anyways and the only thing you can opt out of is accepting the tickets once they're bought and paid for. You might not like baseball, but since you were forced to pay anyways the offer of being able to "opt out" of getting what you paid for is not exactly the same as being able to "opt out" of the whole scheme to share season tickets in the first place.

Until I hear somebody explain how a state would not have to pay for the public option even if they opted out, or if they did, what incentive they would have that would help make up for the shortfall from their decision to opt out it seems like a completely unworkable plan. That's not to say the rest of the plan makes sense, but this feature seems particularly egregious in the way that it has not been thought out, and how a lack of detailed consideration of incentives and understanding of economics seem to make this health-care sage an exercise in political farce bound to turn into legislative nightmare.

Labels: ballyhoo, government, health-care, politics

Populists left and right are supporting "Pay Czar" Kenneth Feinberg's slashing of the pay of top executives at 7 companies that have been propped up by a ton of taxpayer bailout money by about 90% as well as rules for those firms that are designed to incentivize long-term success by making sure that, for instance, stock-linked compensation is pegged to long-term stock performance, presumably to avoid short-term risks that promise a quick buck by piling on long-term systemic risk. That left-leaning folks would support any move to slash CEO pay is unsurprising, but that folks who are generally in favor of a free market are on board with this is a bit more surprising, although not particularly hard to understand.

Bill O'Reilly gave the typical conservative populist justification for this move in a discussion with Neil Cavuto, whose concerns about a slippery slope were dismissed by O'Reilly as paranoid and misplaced. The conservative explanation generally goes something like this: these executives' companies were saved by the government and therefore the taxpayers are essentially the ultimate shareholders and the government is sort of a super-board of directors that looks out for those ultimate shareholders. By making sure that money isn't wasted by paying these executives the gaudy sums of their non-government-money owing counterparts at other firms the government is ensuring that these firms run lean and mean and get paid back more quickly. The reason a conservative like O'Reilly supports the move is that he doesn't want to see taxpayer dollars squandered by lining the pockets of fat cat executives, who by inference, when they work for other firms that are not subject to government regulation, are compensated to a degree that is essentially 10-fold greater than what their performance justifies.

Goldman Sachs's notable success, its many powerful alumni in positions of public service, often regulating both their friends and former competitors (e.g. John Corzine being a Senator and Governor and Hank Paulson being the head of Treasury) and its receipt of public money (both as one of the 9 banks forced to take government capital to shore up public confidence during the crisis last fall and as a very large creditor of AIG) all mean that it is the poster child for the greedy, corrupt, firm whose executives are paid too much because of a friendly system whose rules they control. Despite being held up as one of the worst offenders against any form of social conscience, but having paid back its government obligations, Goldman is more or less back to business as usual both in terms of its business operations and more pertinently to why they're being vilified, in terms of compensation for top employees of the firm. After 2008 when they paid out very little (relative to other years) in base comp and no executive bonuses (they were holding TARP cash at the time) they will be back to paying out millions upon millions in comp for top execs this year with big bonuses too after a boom year for the firm where their stock gained ground amid a bull market. One can see why this situation pisses people off: who decides how much Goldman execs get paid? Goldman execs. The fox doesn't just guard the henhouse... he runs it.

The thing is that Goldman Sachs has been a publicly traded company for a decade now, and it while its top execs are still called "partners" the name is purely symbolic: the company is publicly traded and ultimately the "partners" are not a small group of owners who can act without oversight, but rather they act with the oversight of a board of directors and ultimately the votes of their shareholders. The situation is complicated by the fact that Goldman's IPO was so recent that some larger than normal fraction of shares are held by current or former Goldman execs, but in general at other large companies like Morgan Stanley and dozens of other huge corporations that have been publicly traded companies for a long time, the number of shares that are in the hands of people who don't work for the company is generally the large majority. If the route to profitability were to slash executive pay it seems like that plan would have been pushed for by shareholders at one of the hundreds of institutions set up in this fashion, doesn't it?

And yet there has never been a successful shareholder push at a major publicly held company, even on Wall Street, in the wake of this most recent financial crisis, which in the popular narrative was caused by the incompetence of these well paid plutocrats, where a company's shareholders to voted to slash executive compensation in a manner even remotely similar to the government plan. If it made sense though, you'd think shareholders would be all for this; money not paid out in compensation, especially at a firm without any significant capital costs like a financial firm, would be essentially pure profit and could be distributed to the shareholders as dividends. Yet even as income inequality has risen, the income of the very top portion of earners has exploded, examples arose of extremely dire consequences being the result of decisions made by well-paid, strongly recruited chief executives, still no company took this route. Many of the firms that were run by these very well paid individuals either took a big hit in earnings and market capitalization, had to be saved by government intervention, or went completely belly up, and yet shareholders at GS, Morgan Stanley or any of the hundreds of other corporations in other sectors fail to see the wisdom of demanding that their employees be paid 10% of what they have previously been paid.

Having known many Yankees fans who were generally left leaning, I find it somewhat surprising that for some reason most people I've met who oppose the discrepancy between the pay of say, a chief executive at a large manufacturing corporation and the pay of a blue collar worker at that same company have ever complained to me about the discrepancy of the pay between the players on the Yankees and say, the food vendors at Yankees Stadium. Now I have no problem with this discrepancy; I recognize that the ability to play baseball at the level of a Major Leaguer is an incredibly rare skill. Ironically, of course, their skill is at playing a trivial game, but since millions of people enjoy watching that game and will pay for the privilege, their skills generate wealth and improve the quality of the lives of people who happily exchange hard earned money for game tickets, Yankees caps, etc. But perhaps it is merely because people intuitively understand that Alex Rodriguez's ability to hit a baseball is exceedingly rare it is the reason that they do not complain that he is paid tens of thousands of dollars per hour of game time. They understand that the idea that the Yankees would try to slash costs to improve their team is ludicrous. As in real life, in Major League Baseball, human capital is mobile; an inability to pay people well will lead to a lack of talent (see the consistent failure of teams like the Pittsburgh Pirates that chronically cannot pay as well as the Yankees) and people interested in seeing the Yankees be successful on the field and at making money obviously think that their massive payroll to get and keep top talent is justified.

In the realm of finance, it seems, people are under the impression that CEOs are replaceable, a dime a dozen, interchangeable, and that systems of evaluating and pricing talent in positions of crucial importance for the success of the organization are disconnected from incentives like seeing the firm succeed or control risks. But just as sometimes the Yankees misallocate large amounts of payroll (see Carl Pavano) and such examples and tales of golden parachutes on Wall Street show that such systems are obviously imperfect and sometimes absolutely wrong, and just as the Yankees don't always win the World Series just because they pay their players several fold more than most other ball-clubs, that doesn't mean that the entire premise of incentivizing performance with pay is flawed.

For now, the fate of these 7 firms will be interesting to watch; as financial wards of the state the mobility of their top executives and the autonomy of decision-making of the firms' employees both in staying or leaving and in day to day operations is unclear; it would seem to me that the best executives, who suddenly find themselves being compensated for the foreseeable future at a level that a competitor could easily double, triple, or increase nearly 10-fold, would jump ship if they could. If they can't, their incentive to try to rise up within the organization and put forth the extraordinary effort of the stereotypical workaholic businessman glued to his blackberry seems like it would only be to maintain their reputation so that their pay will increase relative to past levels once they can either be paid in the old way by their firm once they're out from under government regulation or once they can leave their current firm.

So at best there are reasons for the best workers to try to leave the firm, for other firms to poach talent at bargain basement prices, and only weak incentives to continue putting forth full effort that would increase profits and get the taxpayers their money back that are contingent on the idea that their pay will someday be back to near what it would have been. The automakers regulated under this plan can be discounted; they will never be profitable for reasons unrelated to executive compensation. But the performance going forward of Bank of America will set a bad precedent no matter what happens; if the pay cuts decrease the quality of employees or the quality of their work then capital will flow out of the firm, the firm will be less profitable, and taxpayers will wait longer to get their money back. Further, if there is a massive flight of talent from these firms then the incentive for the government will be to somehow level the playing field and limit executive pay more broadly. If the firms exceed expectations then the government will be emboldened to curb CEO pay more broadly and more worrisome, the model of a firm "too big to fail" seems like it will be proved viable and government will inextricably become more intertwined with business.

The latter scenario seems very hard to fathom, however, and I doubt that this experiment will do anything but prove that while imperfect and probably permeated by a significant fraction of misses, the system of rewarding outstanding performance abilities held by a limited number of highly talented individuals with a a very rare skill with outstanding compensation will be vindicated. While no one questions that Alex Rodriguez has a very rare skill that is therefore worth very high compensation in a free market, seeing why some white guy in a suit is so special is less easy to accept; if it weren't him it would be somebody else, it seems, but the number of individuals with the intelligence, experience, leadership and interpersonal skills to successfully create business strategies for an extremely complex business like an investment bank that deals with billions of dollars daily is few, and those who do so successfully must be compensated well to maintain competitiveness in a global marketplace. While there will be unsuccessful individuals and they should be sacked, while it's no more fair than the gaudy sums that Alex Rodriguez is paid for playing a children's game very very well, you should be paid a competitive rate if you possess the ability to successfully helm a company that facilitates trillions of dollars of global capital flows in a given year and creates massive amounts of wealth for those who work for the firm and, in the case of say, a successful investment bank or fund management firm, for the businesses who are their clients or the investors who trust them with their money, often including large institutional investors such as state or union pension funds.

Is it justified? It depends. But while money talks, it also walks these days. If the U.S., for instance, were, hypothetically, I stress, to cap CEO pay, it seems likely that foreign firms like UBS and Deutsche Bank would feel that the skills of the executives at competing firms like Morgan Stanley and Goldman would be valuable enough that they would pay them a large amount of money to jump ship. It's like the Yankees and Red Sox, now, but we could make it like the Yankees and Pirates. Why we would think that would be the way back to competitiveness, I have no idea.

One final comment, to paraphrase a quote from the man behind this decision to cut CEO pay at these government indebted firms, Special Master for compensation Kenneth Feinberg, he says he doesn't want to be called the Pay Czar because that suggests imperial powers whereas his job has involved months upon months of negotiations and meetings and haggling and this number and plan were reached in a process that resembled a negotiation. There's only one problem. The final decision rested in the hands of one Kenneth Feinberg, and while the companies can appeal this decision, the appeal goes to... Kenneth Feinberg. That sounds like an imperial power to me, no?

Who is John Galt?

Labels: ballyhoo, baseball, economics, government, politics

Two hundred twenty-five individuals possess half of the privately held wealth in the world, at least that's what two protesters on TV said as a reason why capitalism is bad. The two young women were protesters of the G20 summit and the system of mixed markets and government regulated global capitalism that has, through historical trial and error, proved to be the worst system of capital distribution other than any other one that's ever been tried. Sadly, while I didn't catch the vocation of one of the two ladies one identified herself as a graduate student (subject left unspecified) at the University of Pittsburgh.

It seemed hard to believe that there are people who are in line to earn post-graduate degrees who say things as banal with regards to capitalism as a system as "why does anyone need to make more than $500,00 a year?" and when asked what their alternative system of wealth distribution would be they would be for not centralized government based control of the economy but "people-based distribution of wealth." It's one thing to distrust that corporations will not use power they accumulate for nefarious purposes, or to think that our country doesn't do enough to provide enough social welfare programs by taxing the rich further. But how can someone who graduated from high school and then college not make basic observations like: living standards for people generally are highest in countries that, while they have greater or lesser amounts of government redistribution of wealth, are fundamentally market capitalist systems (with regulation) and that furthermore this economic system is compatible with representative forms of democracy that generally promote the greatest amounts of personal freedom of any historical political entity? Did they not pick up the independent thinking skills to follow their thought process of "people-based distribution of wealth" and "why should anybody make more than $500,000 a year?" and get to the conclusions that people work based on incentives, that in a "people-based wealth distribution system," the incentive will be to get non-monetary perks in the form of political power, that history has shown that this inevitably leads to a powerful elite and an enslaved population and finally that if you don't let people make (and keep) more than $500,000 they won't go out and do the work that creates the wealth that make all of our lives so much better than they would be if we didn't have this society.

Sadly, too, the grad student at the end launched into a maudlin story at end of her interview about how she came from working class stock and cared about the poor and that if all America's wealth were split up evenly that a family of 4 would have nearly $200,000. Sigh. Of course, after that year where you confiscated all the peoples' money the massive disincentive on wealth creation would cause the amount of money available to a family of four next year to be a much, much smaller number. Further, she didn't seem to understand the beauty of a system that allowed her, the descendant of poor people who had struggled through life with much more difficult conditions of living and no time to ponder the evils of capitalism, to have in a few short generations to have, based on her own intelligence (such as it is) to have a life in academia where, due to capitalism, she will live in relative comfort and that her capitalist stooge grand parents would be very pleased that their toil within the capitalist system allowed her to live in comfort.

With fundamental tenets of capitalism under threat in less inane and more reasonable ways, though, the general anti-capitalist mood of the country is depressing. Barack Obama pledged today to end the cycle of boom and bust and to regulate executive pay. Why? To what end? The ability to pay large sums of money for extremely rare, high wealth generating talent is a fundamental aspect of capitalism. Is it a surprise that the Yankees and Red Sox, the two highest paid baseball teams in the Major Leagues, are going into the playoffs as the favorites... again. If CEOs are ineffective then that is a failure of the market and the answer is to empower competitors of the company who is squandering money on an overpriced CEO. In baseball it seems to work well enough; sometimes baseball players have flukish prior performance and they get lucrative contracts that are too rich for their talents, in general quite a bit of research is dedicated to allocating salary so that the competitive value added to the team is worth the outlay.

Booms and busts are another feature of the capitalist system; the worst system except for all the other ones. For all the complaint about stagnation of median wage growth--which is a valid concern, and is a symptom, I believe, of the U.S. not embracing the knowledge economy in deeds actively enough, as the financial difference between the intellectual/educational "haves" and "have nots" ever starker--the U.S. still has a higher median income (not mean, median) of any major industrialized country (I believe Luxembourg beats us.) So are there problems with the system? Of course; they're just much, much more manageable than those of any other system of economic arrangement. Financial regulation is fine, but as I've written before, it's naive to think that you can have only the boom part of capitalism. You can ratchet down the amount of risk people can take... and of course thereby ratchet down their ability to make a strong return on investment. This is a question we should have frankly; in Europe they all already had slightly less, were more equal to each other in wealth, but were still often wiped out by the global crash; Iceland--the whole country--had to declare bankruptcy. We can go to a more European, regulated, less income inequality, less free market system, but we do so by sacrificing GDP growth, innovation, speed of increase in quality of living conditions, and ability to provide fuller employment. France has been at about 10% unemployment for years. Are we so short sighted that having, for most of us in society, not lived through the Great Depression, not having felt the down-side of a system that gives people an essential quality to be free economic actors who can take risks (which--I guess people forgot this--can end badly) once they taste that dark side that manifests itself cyclically, they're ready to give up on the whole thing. They're ready to throw away the booms in order to throw away the busts. Like the girl who asks why we anyone should have more than $500,000 a year and wishes that everyone just had an equal share of the $200,000 we generate per 4 people in this country, there's very little understanding that the convictions that those who went before us and created the greatest wealth creation engine in the history of the world are being cast aside for a vision of benefits without costs that will never materialize.

Labels: ballyhoo, economics, government

In the debate over health-care, many other countries are held up as models of systems that, while not perfect, don't let anyone fall through the cracks and do a better job at avoiding preventable deaths than the U.S. The implication: keep your massive insurance premiums and plastic surgery and give me an effective, government regulated program.

The other industrialized nations seem to get more bang for their buck; across the entire 25 nations of the EU, according to an EU analysis of health-care spending and effectiveness, a mere 8% of GDP is spent on health as opposed to the US where we spend nearly double that at 15%. They don't give a tabular form of health-care spending as a percentage of GDP but it seems that in the EU15 (i.e., the Western European countries with whom our economies are most comparable) they spend more than the EU average; the text mentions that France and Germany both spend approximately 10% of GDP on health-care. However, one questions their metric on the rate of avoidable deaths when they note that

Spain and Greece, which spend much less on health care than Germany (approximately 8% of GDP), do a much better job of avoiding mortality. Similarly, levels of avoidable mortality do not always refl ect levels of spending in the newer Member States either (Newey et al. 2004).

Whoa. So the German model of state-regulated organization of people into what are essentially health-care co-ops that get treatment from for-profit providers, is inferior to the public option model of Spain, a public insurance scheme in which most Spaniards take part? Or that the newer members (i.e. countries in Southern and Eastern Europe) are better too? Not to slander places like Spain and Greece and Slovakia (from where some of my ancestors trace their roots) but would you rather have the health-care accessible in Spain and Greece and the newer members of the E.U. than that, not of the U.S., but of Germany or France? Greece and Slovakia and Spain simply don't have the GDP and general level of technological advancement that make me confident that this metric is accurate.

But let's take the into account some other issues. One issue conservatives in opposition to the current legislation proposals bring up over and over is tort reform. One they do not is intellectual property. I have not heard once mentioned that one of the few sectors of the global economy where free trade has not been on the march as we've globalized the economy is pharmaceuticals. I heard some people ask at the health-care town halls why the U.S. government doesn't use its considerable bargaining power to get us the cheap drugs they have access to in Canada. The short answer is that if we paid the same as Canada for drugs there would be a lot less money for drug R&D. As a research scientist I'll tell you the way that funding is doled out by the Federal government via the NIH, sometimes the National Endowment for the Sciences and private foundations while meritocratic and not bad attempt at reaching an optimal distribution of limited public and charitable resources looks, in scale, like absolutely small potatoes next to what even a pilot program co-development contract with a big Pharma company looks like. Furthermore, even though an academic who, say, discovers a drug does not actually own the intellectual property rights to his discovery (generally the University or other research institution that employs him does) but if that drug goes on to be profitable, even though the revenue for the institution is only a royalty paid to license the drug, and then somewhere generally around 50-75% of the net revenue to the institution goes to the department, further research funding, etc, so a small fraction of a small fraction ends up with the inventor, that can still be enough to make that guy a millionaire many times over. (Note: this is an exceedingly rare consequence of becoming an academic scientist.)

At any rate, Big Pharma has that money to offer scientists with potential drugs to develop and the money to pay for licensing of basic science (they do their own proprietary, non-published R&D too) and also do things like have some of the most impressive biomedical journal libraries I've ever seen because they make a lot of money, it's true. They make most of their money in the United States market because a) it's a huge market and b) consumers or their insurers pay a lot more than people in other countries. In other countries, first of all, patent law differs and any disclosure of things like the molecular formula of a drug before an international patent is filed renders it public domain, whereas in the U.S. a placeholder can give drugs that were not developed in house at big Pharma R&D labs about a year of protection between say, publication or presentation at a conference and patenting. This is a small part of the problem, but it puts some drugs into the public domain in other countries that are profitable in the U.S. More importantly, other countries with nationalized health systems can basically make the pharmaceutical companies a pretty difficult to refuse offer (although not impossible; sometimes the most modern drugs for treating, say, a relatively rare cancer are not available in places like the UK because reasons of cost dictate that the national health-care system doesn't buy the drug) But generally, the offer is something like this: give us your drug at a price that is far below what it is in the U.S. but is still going to make you a profit in the sense that now that you've got the ability to mass produce the drug, the cost to make a pill is far less than the price on offer, or don't sell your drug in our country and reap no money at all. Let's see... the choice, after you've already done the R&D and built the factories is between: large volume of sales that generate far more revenue than they do expenditures on things like labor and materials, or have invested all that money in R&D and manufacturing and don't sell it to a huge swath of the world... Of course, that "profit" that the companies make when you look solely at the cost of making a pill versus how much the pill is sold for is not enough to both fund R&D and actually create real, net profits for the company which has to do lots of expensive R&D before it has a pill to offer,. Generally the difference is made up when companies recoup their less profitable sales with higher prices on U.S. consumers, who fortunately for big Pharma and foreigners but sadly for Americans, live in a country that does not engage in government price controls of pharmaceuticals (yet, anyways.)

We hear often asked "Why can't Americans pay what Canadians do for prescription drugs?" I think a better question is: Why can't the Canadians, the British, the Germans, the French, etc., pay as much in the future as Americans, which would be less than we pay now, but more than they do. Am I being unfair? Am I claiming that the Europeans are basically cherry-picking of expenditures made by the U.S. to sustain health care programs for a lower cost than they could if the U.S. didn't do what it does? Basically, yes. Let's take a look at, say, military expenditures. They slice a full fifth of the pie (20%) of the U.S. government's expenditures and the U.S. military frankly provides protection (sometimes literally, as in Germany and Japan and South Korea) and figuratively by providing a military option to deal with any rogue states who engage in aggressive acts for many countries whose health-care systems we can attempt to emulate like Germany, the UK, Canada and Taiwan. Taiwan is an exception to the following statement, but it certainly spends less on defense than it would if the U.S. didn't keep carrier groups in the western Pacific. With that exception, expenditures in the European and other industrialized countries by the government must be topped by the UK, which at 6.6%, spends almost exactly one third as much of its government expenditures as the U.S. spends about 4.5% of its GDP on its military; Germany spends a good bit less than a third of that at 1.3%. If we were in the opposite position and the EU spent so much on keeping the peace via military spending that we could go from 4.5% of GDP on defense to 1.3% and shifted that peace dividend to paying for health-care we'd basically have the disposable income of a country that spent a shade under 12% of its GDP on health-care, comparable to the 10% Germany spends.

The military situation is a non-sequitur, you might argue, we chose to be the global policeman or at the very least chose to invade Iraq, and at any rate we were the ones who demilitarized Germany and Japan and attempted to avoid military build-ups in other industrialized countries in the first place. True enough. A more direct issue of cherry-picking is the fact that as alluded to before in terms of prescription pharmaceuticals, all sorts of biomedical innovation takes place disproportionately in the U.S., where we spend more money per capita on R&D, driven by our more profit-driven health-care system, and the rest of the world reaps the benefits as medical devices, techniques, and basic knowledge generated in the U.S. become available for use in countries that have eliminated a powerful incentive to innovate from their health-care systems.

First of all, looking at research across a wide panel of biomedical research categories, using a metric of average impact of the research done in a field in a country (specifically "transferred Normalized Mean Citation Rate"--the world mean is 0 as will become obvious), the U.S. out competes every country in the world, with a mean of .155, versus a respectable .118 in the UK, but of the 6 large, industrialized countries in the study (the US, UK, Germany, France, Italy and Japan) the next highest value is Germany at .026, followed by France at .012, Italy at -0.052 and Japan at -0.111. That America's research would generally have an impact that much greater than Germany, original home of Merck (now an American company, natch) and once the land whose language was the lingua franca of science says quite a bit about their innovation. This measure in the field of Clinical Medicine is even more striking, with only the UK being competitive with the U.S., with the U.S. 0.165 and the UK at 0.093; Germany, France and Japan, all considered model health systems? They respectively come in at -0.029, -0.07, -0.10. Worse than the global average of scientific papers written.

OK, well, that's a metric about how good countries are at writing papers. What about the whole kit and caboodle of biomedical research. Glad you asked. Two countries in Europe outspend us on R&D as a percentage of GDP: Sweden and Finland. They spend 4% and 3%, admirably, compared to the U.S.'s 2.7%. The only model system frequently mentioned that comes close the U.S. is Germany at 2.4%, but as shown above, their bang for their buck is questionable. The study from which I'm quoting these new figures found something similar to Hu and Russeau, which is that per billion dollars of R&D dollars spent Germany generates 1200 and change citiations, compared to over 2600 for the U.S. Research spending in the original 15 EU countries (essentially Western Europe plus Greece) is 1.9% of GDP throughout the region compared to America's 2.7%, with generally less productive research, with 2665 citations per billion dollars spent in the U.S. versus 1723 for the EU-15.

This doesn't explain all the discrepancies but it points to the sources of some of them. We spend more on R&D because the market demands it as opposed to the state mandating how much we get. We get more bang for the buck because, heavily regulated though it is, U.S. research Universities and hospitals still are under more consumer pressure than their European counterparts to innovate. We pay more than we should because of a trade status quo where Pharmaceutical companies make up for nationalized price controls in the rest of the world by making up the difference by tapping the U.S. consumer. In other countries more regulated economic systems provide for less disincentive to becoming a doctor relative to the drop in pay (doctors in Germany and Japan make about half of what their counterparts in the U.S. do) because there is less income inequality. Regardless of how you feel about income inequality, it seems axiomatic that in a country with greater income inequality implementing cost controls to reduce the percentage of GDP spent on health-care by lowering doctors salaries will, ceteris parabis, mean more people dissuaded from becoming a doctor than in a country where more lucrative options are less plentiful and less profitable.

Health-care must be reformed. No one disputes this. But I question whether it's fair to argue, by implication alone, that the reason the U.S. spends so much more on health-care as a percentage of GDP is merely that we are lining insurance company CEO's wallets with profits. A number of structural factors mean that we spend more on research, are more productive in that research and therefore drive medical innovation in the rest of the world, and the cost of that innovation is therefore born disproportionately by the U.S. Similarly with prescription drugs, a trade regime that allows for price controls around the world leaves the U.S. consumer in a position where they pick up the slack for the a world of patients who are free riders. Simple structural differences in the countries like what a young person looking to make a career's options are, and the financial reward they will receive in relation to the amount of work they will do if they enter a health-care profession versus another profession all make U.S. health-care more expensive. We could nationalize health-care and control costs; in this country, though, doctor shortages of the type seen in Canada and Germany and Japan where their economic structures and socioeconomic and demographic pictures are more egalitarian and homogeneous than ours, would probably arise, and probably be worse than in those countries. In other words, before you say that big, industrialized countries aren't in financial ruin because they have more highly regulated health-care structures (and they spend less money, too) jumping to the conclusion that if we adopted the same structure that we could afford it (and the corollary that we'd actually save money) is far from obvious to me. I'd like to see these questions addressed before analogies to systems in other countries that differ in so many ways from our own are tossed about.

Labels: ballyhoo, economics, health-care

I watched another C-SPAN televised town hall today and they've done the country and those who care to pay attention a huge service by doing so. The narratives that the meetings are either infiltrated by unhinged, astroturf Republican sycophants shouting down Democrats or that ACORN or SEIU or other community organizations or unions have organized a massive, concerted counterattack both overstate the case. There are varying degrees of rancor depending on the position of the member of Congress and the political leanings of their constituents, and while there is anger and there are occasionally small groups of people shouting or a large portion of the audience booing, out of turn and in anger, for the most part these incidents result in brief delay in the proceedings, not any sort of effective "shouting down" of the opposition in the sense that those with opposing viewpoints are allowed to express them--they have the microphone--after a brief outburst. Similarly, while those who support the bills seem to be slightly more organized than those who oppose it--often a number of are carrying multiple copies of the same sign, and others who are in their camp have hand-made signs, all of which are held up when the anti-reform crowd cheers in an (ineffective) attempt to create a confusing visual image. References to Nazism have not been present in several meetings I've seen, and the most outlandish thing a supporter on the right said was to question whether Barack Obama was, in fact, a patriot. Jim Webb--whose town hall this view was expressed at--said this was beyond the pale of civil discussion, although permissible under free speech, but that he disagreed with questioning our President's patriotism. Overall the impression I got was that while there is a lot of anger that the idea that the protesters on either side are political pawns or crazy people was completely wrong.

Most opponents were concerned about the general contradiction of how we can save money by expanding care to millions of new people--the Democratic argument basically seems to be that the $1000 tacked onto most folks' health insurance premiums annually to provide acute, emergency care to people who have no general health coverage is equal to or greater to the cost of both insuring them all and also paying for the subsidies of the insurance premiums for all that seem like they must go up if the whole country basically adopts community rating--health insurance companies must charge people more or less the same rate within some relatively narrow band whether they are healthy or not--and furthermore those companies must accept people with pre-existing conditions. The math doesn't seem to work out; you're going to make insurance a lot more expensive for everyone, promise that the government will pay for the part that people can't afford, and put a lot more people into the program, those of whom are the horror stories that necessitate this reform are those who will cost the most to provide care for and/or are the least able to pay for their insurance.

Jim Webb's answers to the hard questions seemed to make much more sense than the Senior Democratic leadership--although to be frank, the partisan anti-health-care reform crowd didn't seem to buy his arguments--but his arguments provided some serious questions about the role of government. His good ideas, first of all, were that he would oppose specifics about proposed legislation that seem to violate the pledge to make this plan pay for itself. Specifically, he opposed the public option at first and if it were to be implemented later to increase pressure to drive down costs it would have to compete on a level playing field and not run at a loss subsidized by taxpayers; he recognizes that this simply continues the failed premise of entitlements like Medicare and Social Security and would lead to a massive budget shortfall in a short period of time. I wasn't quite sure what to make about his proposal that doctors be compensated differently, with the general idea being that the incentives be changed from procedures performed to overall outcomes of patients--an idea which both in theory and as Webb explicitly pointed out would steer more people into becoming GPs and would reduce the disparity in compensation between hot-shot specialists like brain surgeons and the doctors in the trenches of pediatric medicine and general practice. This seems like a necessary type of reform to do something about runaway costs of medicine, but unfortunately it takes a lot more work and years of schooling and skill and is generally something that in the free market would be compensated more richly to be a brain surgeon than to be a pediatrician. Social engineering to encourage the few people who want to be doctors to be GPs by changing the financial incentives so that even when the objectively measured amount of training and difficulty of performing brain surgery is greater by a fair amount than that to become a GP that the discrepancy in pay will be lessened seems like it will lead to a shortage of brain surgeons and therefore waiting and rationing of brain surgeries. And this would apply to all acute and semi-acute specialties where the U.S. truly leads the world... orthopedic and trauma and cardiac surgery, surgical oncologists cutting out tumors, oncology in general.

At least, though, Webb claims he would not vote for a bill that would increase the deficit and laid out specific ways in which the overall cost of health-care must be cut in order for him to believe that the bill will be paid for. He also proposed some unpopular revenue sources to pay for the inevitable short-fall in savings and the cost of the new program (in addition to the $200-$500 billion in cuts to Medicare in the several bills) such as taxes on those who have really expensive "Rolls Royce" health-care plans that cover virtually everything. As a believer in markets one would think that would create a massive niche market for insurance providers who provide the richest possible coverage that isn't taxed and would therefore generate less revenue than the government will predict, but at least he's thinking about it.

As a sidebar one thing he seemed somewhat less dismissive than most Democrats of including Republican ideas that are largely structural changes that are free to the taxpayer such as serious tort reform, truly pro-competition and anti-defensive medicine provisions in a final bill. He did say that 35 states had caps on malpractice awards, but seemed to fail that this was not the only way to reduce the massive malpractice premiums doctors pay. I've found the absolute demonization of insurance companies understandable, but have found the lack of any noise about trial lawyers or any movement by Democrats to throw them under the bus surprising. Loser pays rules, limits on non-economic damages, more stringent rules for what constitutes malpractice such as necessarily including some deviation from a well-defined standard of care could all drive down the massive cost of malpractice suites which manifest themselves both in insurance costs but also in the defensive medicine that doctors practice--this seems like pure common sense--Webb was not dismissive of it, but on the other hand, he was very, very far from promising that he was going to go back and take the word of the people to Harry Reid and make sure that every member of his party would have to vote up or down on including such reforms.

In general his business experience and experience successfully running Virginia's state government with a heavily Republican legislature was clear, and we would do well to elect more officials in every branch of Congress who have actually run things and understand--apparently contrary to many on both sides of government--that waving a wand and declaring something so by fiat is very different from getting in the trenches and making something work. One thing I wonder about, though, is that as a businessman why he doesn't ask why health-care costs are rising so much faster than inflation: how much of it is it due to waste, fraud, deceitful practices of insurance companies and pharma companies and other economic players in the industry and how much is it due to innovation, increased amounts of expensive care being given, and a general rise in the number of transactions where people willingly get effective, life-extending treatment from doctors? A novel proposal he brought up that I've thought about previously but which I've never heard a serious national politician bring up is to address through trade policy the fact that government-run health-care systems in foreign countries (including in the first world) generally have price controls in place and give U.S. Pharmaceutical companies a choice: sell us the drugs at a deep discount and take a small profit margin or we'll wait til they go generic or (in some cases in some countries) circumvent your intellectual property rights and you'll get no profit. That does not spread the burden of paying for massively disproportionately U.S. based pharmaceutical R&D across the industrialized world and is why drugs cost so much less in Canada than in the U.S.--the current model is to get the U.S. market to support the rest of the world by paying retail while they all get the drugs at just above cost. He deflated the can-do spirit of liberal questioners who asked why we don't do what Canada does and use the U.S.'s massive "bargaining power" to negotiate for better drug prices like every other country. Short answer: if there's no profitable market for big pharma, they'll stop producing new drugs. This is a very good idea, but why we can't institute the trade reforms to make the Europeans pay their fair share for drugs outside the scope of a massive overhaul of the entire U.S. system of how health-care reimbursements are paid is beyond me, though.

I still see serious problems with this much less drastic, much more acceptable plan that Webb outlines the broad strokes of, as opposed to HR 3200, though. First, one of the details he outlines for driving down costs is not only having community rating but FORCING those young people who have the money to buy health insurance but choose not to to do pay for a plan (or part of a plan since the plans they can buy in most states now are much, much cheaper than they would be under the Webb plan.) This seems blatantly Unconstitutional, and in the way that gets overturned by Supreme Courts, especially conservative ones, which unless one of the 5 conservatives dies or retires, we will have for the foreseeable future. I say "in the way that gets overturned" because there are many Unconstitutional laws--say Medicare and Social Security-- for which no Federal government mandate exists in Article 1, Section 8 of the Constitution but which give people free money. People generally don't complain about those. When you go from allowing people to make a choice as a free person in a free country not to buy something (health insurance) and live with the risk, such as it is, that you might go bankrupt and be a burden to society if you got hit by a bus, to forcing them to buy such insurance basically in an indirect and somewhat bizarre form of taxation to decrease the overall risk of an average person in the insurance pool to try to keep the premiums of the new insurance companies who are community-rated, allowing prior-existing-conditions, and denying less procedures, those people are going to be upset and ask where the Constitution allows the government to force them to buy something they don't want. Can you think of another good the government makes you buy? Car insurance, yes, but the whole problem with that analogy is that you don't buy a car and drive it around on your own property... you drive it around public roads. In other words, you're taking advantage of a government maintained road network to get to useful places, your driving affects others safety, you have to be licensed to drive on that network, and therefore increased regulation is permissible. Driving on publicly funded and maintained roads is a privilege, not a right. Living and choosing not to buy insurance, thus far in our country's history, has been.

In response to the specific question of what Article and Section of the Constitution Webb would cite to justify the government's takeover of the health-care choices of virtually all Americans in some sense--even if they don't immediately change the structure of coverage for most Americans--his answer was not only a red herring and a total dodge in a format where the questioner could not respond, it was highly insulting. He responded that since this law clearly cannot be justified by the Constitution and since Medicare and Medicaid and Social Security cannot either that he "assumed that the questioner wants Medicare and Medicaid and Social Security to be repealed." The questioner was not allowed to say if they would repeal those programs if they could or--in a rhetorical stance similar to one Webb used before saying that if we were starting over that he would not link health-care to employment--would do so ideally but in the real world recognize that this is unworkable. In addition to blind-siding this woman who asked a legitimate and fair question with no chance to respond, he demands of the questioner an ideological coherence that he exempts himself from. While the questioner must by virtue of asking what the Constitutional justification is of this law support the immediate repeal of every Unconstitutional social program written into law that is essentially Unconstitutional--the good Unconstitutional laws as mentioned above-- Webb can take the stance that since a previous government passed an Unconstitutional law every future government can do so, as well, and not have to answer to their constituents. By defying her to support the destruction of other programs--by which he presumably meant to say that since these laws that many people like aren't justified by the Constitution that we've come to a consensus that the Constitution can be ignored--he essentially openly defied his oath of office: to protect and defend the Constitution. I guess they should add a codicil "unless people get free money."

Our founders were clever in writing the Constitution and they anticipated the very dangers of Unconstitutional, popular laws like Medicare and Social Security. The power of the many who stand to gain is in theory checked by the fact that the power to create a national system of social insurance or medical coverage is, in fact, not among the powers listed to Congress and therefore is reserved to the states and ultimately the people. Unfortunately, previous generations of lawmakers have taken the easy way out and ignored their oath to defend and protect the Constitution. If we're ever going to get on the road to sustainable financial demands on our citizenry and paying off our debt, sticking to the powers enumerated by law and reforming the massive body of Unconstitutional but popular law--and not passing any new, Unconstitutional entitlement programs--would seem to be a good start.

Labels: ballyhoo, constitution, government, philosophy, politics