Why Republicans Can’t Reform Health Care

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July 26, 2017 —    Why do Republican politicians seem unable to come together on a bill to “repeal and replace” the 2010 Affordable Care Act, also known as Obamacare?  After all, they have spent 7 years with that as their single-minded goal, they campaigned on it in the 2016 presidential election, and they now control all branches of government.

It is tempting to blame lack of experience and competence on the part of the president.  But that doesn’t explain why the Republican congress can’t do it without him.  Some Republicans blame unwillingness of the Democrats to cooperate.  But given their majorities it should not be necessary for the other party to cooperate in dismantling its most important achievement of the last eight years, nor is it remotely reasonable to expect them to do so.

Don’t be misled by the reasonable-sounding formulation that, since everyone agrees that Obamacare has flaws, a bi-partisan replacement to improve it should be possible.  The most important of the existing flaws in Obamacare are there because Republicans insisted on putting them there, not because of unforeseen consequences of the original proposal.

It is a little closer to the truth to say that the Republicans negligently forgot to formulate an acceptable replacement in all their years of voting to repeal Obamacare.  But that makes it sound like they could come up with an acceptable replacement if they tried hard enough.  They cannot.

The relevant division among Republicans

Republicans in Congress are divided.  Whatever version of the bill they try out, they cannot seem to put together the necessary majority.  But the familiar distinction between “hard-core conservatives” and supposed “moderates” is not the most useful way of looking at the split.  They are divided, rather, between those who acknowledge the laws of arithmetic and those who do not.

By the way, it is the same division that has plagued the Republicans over tax policy for almost 40 years: they all want massive tax cuts but some also proclaim their commitments to pay down the national debt while preserving military spending, social security and Medicare, while others recognize that this combination is arithmetically impossible.

When Republicans say they want to repeal and replace Obamacare they mean not just a change in name, but a general reduction in the role of government in the health care system and, in particular, an end to the individual mandate that requires all Americans to have insurance.  They are divided between those who recognize that the result of the various repeal and replace proposals would be a loss of insurance by many and are willing to accept this reality, on the one hand, and those who do not recognize it, on the other hand.   The decline in the number of citizens who have coverage would exceed 20 million, according to estimates of the Congressional Budget Office (which, contrary to some desperate claims, have a very good track record).

An example of the first category is Rand Paul of Kentucky, one of the few more-or-less-consistent libertarians who deserve acknowledgment for intellectual honesty.  But if his policies prevailed, the losses inflicted on lower- and middle-income workers would be so severe that the Republicans would probably be voted out of office for a generation.   That logic assumes that there exists a limit to the scope for large numbers of Americans to vote against their self-interest.  (Indeed, Republican proposals to take away benefits are now very unpopular.)

The second category of Republicans finds the loss of health insurance by 20 million citizens unacceptable.  This group still doesn’t know what it wants, even after all this time.  Some of them may take refuge in a solution where millions end up on skeletal health care plans that don’t offer true protection against the cost of serious health problems, so-called junk insurance.  But this solution is no more attractive than the loss of coverage altogether.

Logically there should be a third group that acknowledges the arithmetic, finds the loss of 20 million uninsured unacceptable, and then chooses to face reality by working for a version of Obamacare or some other plan that can continue to expand the numbers of Americans who have health insurance.  This third group would properly be labeled the moderate Republicans.  Unfortunately there is nobody left in this group (except perhaps Susan Collins of Maine).

Options with an expanded government role

Consider a birds-eye perspective on alternative health care systems.  At one polar extreme is socialized medicine: the government directly provides health care to all.  The British are attached to their National Health Insurance.  But different nationalities have different preferences.   Nobody in US politics is arguing for a government takeover of the health care system, even though some opponents of Obamacare have falsely described it in this way.

Who supplies health care is a different question than who pays for it.  A substantial fraction of Americans would support a single-payer system.  It can be described as “Medicare for everyone.”  Other countries like Canada make it work, delivering high-quality health outcomes at a fraction of the cost of the US system.  Advocates point to cost savings from paperwork reduction, for example.  Still, it would be unrealistic to think that US government health insurance for all would be anything other than a very expensive new mandate – at a time when voters are unwilling to pay the taxes that would be necessary to finance the level of mandates that we already have.  Certainly it will continue to be opposed by three influential groups: the insurance industry, those consumers who are happy with their current employer-paid plans, and Republicans in general.

Is there a free-market option?

What would the oppose polar extreme look like, a system where the ethic of “personal responsibility” insists that nobody gets health care unless they or their employers pay for it?  It is hard to imagine such a system.  It is not what we had before Obamacare; that system was not a model of personal responsibility. The uninsured imposed costs not just on themselves but on the rest of us as well, in ways that go well beyond expensive medical attention in the emergency room.  Those who don’t see a doctor regularly are more likely to fall victim to alcoholism, obesity, smoking, and addiction to opioids or methamphetamine.  Even leaving aside the emergency room, many of the uninsured end up receiving some longer-term care for which hospitals are not reimbursed so that they must spread the cost to the rest of us.

If the objective were to stamp out such nefarious practices it would require an active reversal of government policy, to stop the medical profession from providing care that it feels ethically committed to provide.  Taking government policy out of health care would include depriving non-profit hospitals of their tax-exempt status, for example.  Perhaps there could be a new federal law requiring ambulances to leave accident victims by the side of the road unless they can show proof of health insurance.  I have yet to meet a free-market conservative so extreme as to favor such a system, when pushed.

No free lunch

So, as often, the right answer must lie somewhere between the polar extremes (socialized medicine at one end and a pursuit of pure laissez-faire at the other).  It must have something like the key features of Obamacare.  The famous three legs of the stool are:  the individual mandate, no discrimination against pre-existing conditions, and a means to pay for it.

The individual mandate is a key component that makes Obama’s Affordable Care Act work.  Many forget that it was originally an idea that conservative think tanks developed in order to devise a workable system of national health insurance with the minimum possible role for the government and a maximum possible role for the market.  It played the key role in the Massachusetts health care reform signed by Mitt Romney when he was Governor in 2006. (Analogously, two other ideas originally designed by conservatives to achieve agreed goals in a market-based manner were  the negative income tax and cap-and-trade environmental regulation.)

A heavy majority of Americans — including those who thought they hated Obamacare, at least until recently — want to retain the provision that insurance companies can’t discriminate against those with pre-existing conditions.  [They also tend to favor the provision that parents’ policies must cover children up to age 26.]  But they can’t have these popular benefits without also accepting the unpopular individual mandate.  It is simply not financially feasible for private insurance companies to insure people who are already sick or at high-risk, if the still-healthy can opt out of the pool.  The fundamental source of market failure is known to theorists as adverse selection.  This is the origin of the famous “death spiral” that dooms plans lacking the mandate or something like it.  The “no discrimination” leg won’t hold up the health care stool, if the individual mandate leg is removed.

So it doesn’t matter how many permutations of the legislation to replace Obamacare the Senate leadership tries.  They won‘t come up with something that decreases the role of government without increasing the ranks of the uninsured.

[A shorter version appeared at Project Syndicate.  Comments can be posted there or at Econbrowser.]

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The Sugar Swamp

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(June 25, 2017)
As the US, Mexico and Canada get ready to begin talks on the re-negotiation of NAFTA – possibly as early as August – governments are giving a lot of attention to one particular product:  sugar.   The outcome will predictably be a sweet deal for the US sugar industry, quite the opposite of Trump promises to “drain the swamp” of disproportionate influence in Washington by special interests.

It’s an old story, in the US as in other industrialized countries.  The politically powerful sugar producers receive protection in the form of tariffs and quotas on imports, to keep the domestic price of sugar far higher than the price in such low-cost supplier countries as Brazil, Australia, the Dominican Republic, the Philippines, and Mexico.

Sugar in NAFTA

As part of NAFTA, the US was supposed to open up the American sugar market to Mexico.   Indeed sugar was one of the few products in which free trade meant the removal of high US barriers, whereas the Mexicans had high barriers on many US products that NAFTA required them to remove.  But the required sugar liberalization was delayed long after NAFTA took effect in 1994.

Mexican sugar exports to the US did not rise strongly until 2013.  Then when they did, American producers and refiners lost no time in seeking protection.  The Commerce Department decided to give it to them:  tariffs up to 80%. This threat forced Mexico to agree in 2014 to limit its sugar exports and to explicitly prop up the US price.

Mexico this month apparently agreed to extend the limits.   According to Commerce Secretary Wilbur Ross, “The Mexican side agreed to nearly every request by the US industry.”  (The recent agreement apparently has as much to do with protecting American refiners per se by tightening the limits on trade in raw sugar, as with any adjustment in the overall level of protection of the sugar industry a whole.)

Why is sugar protection bad?   Consider some cost/benefit analysis.

Let’s start with the benefits, because the list is short.  The beneficiaries are American sugar growers – particularly a small group of wealthy cane producers concentrated in Florida plus sugar beet farmers in places like Minnesota and the Dakotas.  They have a long history of generous campaign contributions to the relevant politicians.  For example the famous Fanjul brothers, Alfonso and Jose (who incidentally are Palm Beach neighbors and friends of Secretary Ross), reportedly gave a half million dollars for the inauguration ceremonies of President Trump in January.  Another company, US Sugar, has been donating equally generously to Florida Governor Rick Scott.

Economic costs of sugar protection

The costs of measures to protect the sugar industry are far more numerous than the benefits.

  • As with trade barriers in most industries, American consumers are hurt by the high price of US sugar, which has been double the world price on average over the last 35 years.  The cost to consumers has been estimated at $3 billion a year.
  • Candy and ice cream companies of course use sugar in their production and so are also hurt by the distortedly high price. They have been shedding employment for years, as confectioners move their factories offshore where their chief input is less expensive.   (Outsourcing of manufacturing jobs, anyone?)  The International Trade Agency of the US Commerce Department found that “sugar costs are a major factor in relocation decisions” and estimated that “For each one sugar growing and harvesting job saved through high U.S. sugar prices, nearly three confectionery manufacturing jobs are lost.”
  • One might think that making sugar expensive would at least have big benefits for Americans’ health. But no.  For one thing, the artificially high price of the white crystals was partly responsible historically for the explosion in the production of high-fructose corn syrup as a substitute and its use in a startlingly wide variety of foods.  HFCS is at least as bad as sugar health-wise.
  • Sugar cane in Mexico is produced by hundreds of thousands of small, mostly poor, farmers. Depriving them of their livelihood is bad foreign policy.  Think of the undesirable alternatives to which those farmers might turn.  Or think of the larger message that is sent to the world when our actions are seen to contradict its lectures about the virtues of the market system.
  • Limiting imports is also bad for our exporters. The macroeconomic channels may not be obvious.  But if Mexicans can’t earn dollars by exporting to the US, they won’t have dollars to spend on US goods; the dollar will appreciate against the peso and so render US exports uncompetitive.  More tangibly, if the US were to ratchet up tariffs against Mexican sugar as  we threaten (which we would do in the name of fighting dumping and subsidies), the Mexicans would immediately respond by raising tariffs against our exports (again in the name of fighting dumping and subsidies).
  • The taxpayer is on the hook as well. Besides import barriers, another way that the US government protects domestic sugar farmers is a policy of putting a floor under the price via non-recourse marketing loans (from the USDA’s Commodity Credit Corporation).   When the domestic price dips down near the floor, as it did in 1999 and 2013, the government in practice subsidizes the producers at taxpayer expense (despite “no-cost” promises to the contrary).

Environmental costs of sugar protection

  • If the US hadn’t historically blocked sugar imports from countries such as Mexico and Brazil, it could have used sugar-based ethanol in auto gas tanks, at lower cost to both the environment and the consumer. (This policy failure was worse before 2012.  The American taxpayer paid directly to subsidize corn-based ethanol produced in Iowa, under an incorrect claim of environmental benefits.  At the same time, the US maintained a tariff of 54 cents per gallon on imports of sugar-based ethanol from Brazil, which is indeed good for the environment on net. Even after those egregious features were removed five years ago, an inefficiently high fraction of corn production is still diverted from food use into ethanol.)
  • Speaking of the environment, the last negative effect on the list brings us back to the topic of swamps.  The Everglades – the unique system of wetlands in southern Florida that includes a National Park – have suffered environmental degradation for a century.  They have shrunk to half their original size because the incoming flow of water was diverted by federal water projects early in the last century (by the US Army Corps of Engineers).  Furthermore, phosphorus run-off has altered the eco-system (choking out  sawgrass, feeding algae blooms).  In recent years, plans to reverse the damage to the “river of grass” legislated by Congress in 2000 have been delayed.   The main problem all along has been the nearby sugar cane industry, which demands the diverted water, supplies the phosphorus run-off, and lobbies politicians with some of the resulting profits.  Most recently, sugar interests have posed financial and political obstacles to efforts to build a reservoir (south of Lake Okeechobee) as part of the year-2000 Everglades restoration plan.

Under a free market, it would not be profitable to grow so much cane on valuable South Florida land, if any.  But Trump’s idea of “draining the swamp” in Washington is evidently to artificially stimulate the sugar industry through import protection and subsidies, and to let everyone else bear the cost:  consumers, candy manufacturers, Mexico, and the environment.  That includes draining the Everglades.

[A shorter version appeared at Project Syndicate.  Comments can be posted there or at Econbrowser.]

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The Case against Subsidizing Housing Debt

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SINGAPORE — At the end of the first quarter, according to the Federal Reserve Bank of New York, American consumer debt for the first time exceeded its previous peak (in dollars).  That peak was in the 3rd quarter of 2008, just as the global financial crisis hit.  Although car loans and student debt have been rising especially rapidly, housing debt remains more than 2/3 of the total ($8.6 trillion out of $12.7 trillion).

As a share of income, household debt is nothing like the threat to the national economy that it was ten years ago.   But the new statistic is a good reminder that American households don’t save enough.

Some would say that there must be something cultural in the tendency of Americans to spend while Asians, for example, tend to save.   But there is an important policy component as well.  US government policy is designed as if to encourage as many American families to take on as much housing debt as possible.

Economists hesitate to explain to people that they should borrow less.  The advice sounds too “schoolmarmish.”   It seems to lack sympathy for those whose incomes are not keeping up with the standard of living that they had expected based on historical trends.   But for those concerned with the reach of the nanny state, the state is precisely what encourages citizens to borrow.  And it does nobody any favors to get them overly indebted, as the millions of homeowners who went underwater in the housing crisis ten years ago discovered.

Does homeownership have spillover effects?

Owning your own home is said to be an essential part of the American dream.   There is nothing wrong with planning for a good future.  But there is nothing wrong with renting, either.   Buying a house is not a cause of a family’s prosperity, it is typically a consequence.   Owning is a blessing; over-indebtedness is a curse.

The Economist magazine estimates that the overall effective subsidy to American housing debt runs about 1% of national income per year.   Does owner-occupied housing have spillover benefits to justify this subsidy?

The “ownership society” view argues that homeowners take better care of their properties than renters, which has positive externalities for the neighborhood.   But there is also an argument against artificial public encouragement of home owning:  It contributes to the decline in labor mobility.  In the last recession many who lost their jobs could not move to other parts of the country where jobs were more plentiful, because they couldn’t sell their homes.  There is good evidence that the housing crisis boxed in job seekers.

The mortgage tax deduction

What are the US policies that artificially encourage housing debt?   Top of the list is the tax-deductibility of home mortgage interest.  The deduction, though very popular, is hard to justify on grounds of income distribution:  the benefit only goes to those who have a high enough income to itemize deductions.  Also it loses the treasury a lot of revenue.

Republicans say they want revenue-neutral efficiency-enhancing tax reform, which is properly defined as lowering marginal tax rates but simultaneously eliminating distortionary deductions, so that total tax revenue does not fall and the budget deficit does not rise.  If the desire for revenue-neutrality were genuine, the home interest deduction should probably be the first one to curtail.  Outright elimination is too radical politically.  But the deduction could be limited to $250,000 per person and second homes could be excluded.

If Donald Trump manages to get any economic legislation passed at all, even next year, it is likely to be a tax cut.   The White House has already explicitly said that the home interest mortgage deduction is off the table, a sign that they are not serious about genuinely revenue-neutral tax reform.

Five other policies that subsidize housing finance

Particularly suspicious in the case of Trump is his support for giveaways in the tax code that benefit only real estate developers like him.  One such loophole lets them deduct real estate losses that exceed their investments in the business.  This is how he is presumed to have avoided paying taxes for many years, though the experts have to guess since he won’t release his tax returns.  Another loophole is the use of “like-kind exchanges” to avoid capital gains tax.

But the problem goes well beyond Trump or the Republicans.   The policies that favor mortgage debt are extremely popular.  Virtually all politicians of both political parties have long supported them, taking the goal of maximizing home-ownership as self-evident.  And of course they reflect the views of their constituents.

The list of ways in which the US system tilts toward housing debt goes on.

Some borrowers are encouraged to make down payments as little as 5 per cent (or even less) of the value of the house they buy, rather than the more standard 20%.  Such low capital ratios can quickly go to zero and worse if the house price falls even a little.   Many other countries, such as Korea and Singapore, have ceilings on loan-to-value ratios and other regulations limiting how much households can borrow.   They even manage to tighten the loan limits and tax measures counter-cyclically.  Such macroprudential regulation is the recommended way to help stabilize the housing cycle.

But the US is not the only country with measures that distort decisions toward excessive housing debt.  The United Kingdom has had a sequence of programs such as the Help to Buy initiative, which subsidizes purchases with down payments of only 5%.

Another way the US government has long subsidized housing debt is the role of huge public underwriters, particularly Fannie Mae and Freddie Mac.   They were privately owned leading up to the financial crisis but had an implicit government guarantee from taxpayers, a classic case of moral hazard.  Sure enough, they were put in federal conservatorship in 2008.  Congress could easily repeat the mistake of privatizing them while failing to credibly eliminate the implicit guarantee.   Their capital standards should be raised, just as the regulators have appropriately done for banks.

The Dodd-Frank financial reform bill, signed into law by President Obama in 2010, had many good features to help reduce the chances of another big financial crisis. But the law would have moved us further in the right direction if many in Congress had not spent the last seven years chipping away at it. Here is one example.

The Dodd-Frank law wisely required banks and other mortgage originators to retain on their books at least 5% of the housing loans they made, rather than repackaging every last mortgage and reselling it to others. The reason is that the originators need to have “skin in the game” in order to have an incentive to take care that the borrowers would reasonably be able to repay the loans. Under heavy pressure from Congress, that requirement was gutted in 2014.  This was yet another way to encourage the borrower and lender to skip the part of the meeting in the lender’s office where they check to see if the borrower will be able to pay back the loan.

Home ownership rates

One would think that the US encouragement of housing debt would at least raise home ownership rates.  But it doesn’t seem to, relative to other countries.  Even at the peak of the housing boom, the subsidies bid up the price of housing more than they increased the quantity.  Home ownership was no higher than in many countries with more sensible mortgage policies like Canada (which has no tax deduction for interest).  The result of the 2007-09 crisis was to bring ownership rates down, from 69% to 63%.  And of course the housing debt distortion was itself a key contributor to the housing bubble and crash — perhaps the policy mistake that was most easily identified ahead of time.

People are not aware that most economists have long considered these policies bad for the economy.  They may not care:   We are told that they no longer want to hear from experts.  When did that loss of faith happen?   Wasn’t it when the economy was hit by a housing and financial crisis — which economists supposedly failed to predict?

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