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. Continue reading
My preceding blog post described how market-oriented mechanisms to address environmentally damaging emissions, particularly the cap-and-trade system for SO2 in the United States, have recently been overtaken by less efficient regulatory approaches such as renewables mandates. One reason is that Republicans — who originally were supporters of cap-and-trade — turned against it, even demonized it.
One can draw an interesting analogy between the evolution of Republican political attitudes toward market mechanisms in the area of federal environmental regulation and hostility to the Affordable Care Act, also known as Obamacare. The linchpin of the program is the attempt to make sure that all Americans have health insurance, via the individual mandate. But Obamacare is a market mechanism, in that health insurers and health care providers remain private and compete against each other.
As has been pointed out countless times, this was originally a conservative approach, designed to work via the marketplace: The alternative is to have the government either (i) directly provide the health insurance (a “single payer” system, as in Canada; or under US Medicare for that matter) or (ii) directly provide the health care itself (“socialized medicine,” as in the UK; or the US Veterans Administration hospitals). The new approach was proposed in conservative think tanks such as the Heritage Foundation. It was enacted in Massachusetts by Republican Governor Mitt Romney. By the time President Obama adopted it, however, it had become anathema to Republicans, most of whom forgot that it had ever been their policy.
One can trace through the parallels between clean air and health care. The market failure in the case of the environment is that pollution is what economists call an externality: In an unregulated market, those who pollute don’t bear the cost. The market failure in the case of health care is what economists call adverse selection: Insurers may not provide insurance, especially to patients with pre-existing conditions, if they have reason to fear that the healthy customers have already taken themselves out of the risk pool.
Government attempts to address the market failure can themselves fail. In the case of the environment, command-and-control regulation is inefficient, discourages innovation, and can have unintended consequences. For example, CAFÉ standards (Corporate Average Fuel Economy) were partly responsible for the rise of the SUV. Corn ethanol mandates raised food prices and accomplished nothing for the environment. When “New Source Review” requires that American power companies adopt the most stringent available control technology if they build a new power plant, they respond by keeping dirty old plants running as long as possible (Stavins, 2006).
In the case of health care, a national health service monopoly can forestall innovation and provide inadequate care with long waits. In general, the best government interventions are designed to target the failure precisely – using cap-and-trade to put a price on air pollution or using the individual mandate to curtail adverse selection in health insurance — and otherwise let market forces do the rest more efficiently than bureaucrats can.
American conservatives often talk as if the alternative they would prefer is no regulation at all. But few in fact would want to go back to the unbreathable pre-1970 air of Los Angeles, London, or Tokyo. Even those few who might want to should recognize that most of their fellow citizens feel differently. Political reality shows that the alternative in practice is an inefficient rent-seeking system in which solar power, corn-based ethanol, and fossil fuels all get subsidies or mandates. Analogously, few conservatives in fact will say that they want hospital emergency rooms to turn away critically ill patients who lack health insurance. Even for those who might want this, reality shows that the alternative in practice is hospitals that give emergency care to those who lack insurance, whether because of personal irresponsibility or for reasons beyond their control, and then pass the charges on to the rest of us.
A third example is the Earned-Income Tax Credit. It was originally considered a conservative idea: an implementation of Milton Friedman’s proposed negative income tax, it was championed by Ronald Reagan as a pro-work market-friendly way of addressing income inequality. President Obama proposed expanding the EITC in his State of the Union address last month. But conservatives, again forgetting that it was their own creation, have opposed expansion of the EITC as verboten redistribution. So proposals to increase the minimum wage get more political traction as a way to address income inequality, even though that approach is more interventionist and less efficient.
October 4 is the first Friday of the month, the day when the Bureau of Labor Statistics routinely reports the jobs numbers for the preceding month. Is the havoc created by our current political deadlock over fiscal policy showing up as job losses? We have no way of knowing. On October 1 the BLS closed for business, like many other “non-essential” parts of the government. There will be no more employment numbers until the shutdown ends.
Last week, Wall Street economic analysts responded to the usual surveys as to what they thought the upcoming employment numbers would be. (These surveys are what the media refers to each month when they tell you that employment rose or fell “more than economists expected.”) The median forecast in last week’s Bloomberg survey, for example, was a prediction that the BLS would report that “Payrolls increased by 175,000,” the biggest gain in four months. But there was no word on how many of the respondents recognized that there would in fact probably be no number at all on October 4, because the Labor Department would have been closed by the government shutdown.
It seems to me that this minor blind-spot is symbolic of a failure of Wall Street to focus adequately, until now, on the long-impending government shutdown and still-impending October 17 deadline for raising the national debt ceiling. One reason for the lack of concern up until this point is that observers are jaded; they feel they have seen this movie before (with fiscal cliffs, sequesters, shutdowns, and ceilings); that it is “only politics;” and that Washington always averts catastrophe at the last minute. Well, maybe not this time.
Another reason is that the financial markets all summer long were busy over-reacting to developments regarding the Federal Reserve. The stock market reached a high two weeks ago on the information, which was considered news, that monetary policy was not going to be tightened imminently after all. Now the fixation is passing from monetary policy to fiscal policy. Not a moment too soon.
Both sides in Washington are firmly dug in, and don’t plan to back down. If the politicians don’t get their act together and the debt ceiling is really not raised, the results will be very bad indeed. I actually mean “if the Republicans don’t get their act together.” I think President Obama is fully credible when he says he will not let one faction in one party in one house of congress, in one branch of the government, threaten to blow us all up if they don’t get their way on the Affordable Care Act.
The US has never defaulted on its obligations before. Some continue to imagine that the government could stay within the debt ceiling but meet its obligations out of incoming tax revenue. This is wrong. Even if there were enough tax revenue to service the treasury debt for awhile, there would not be anywhere near enough to meet all the other legal obligations that the federal government has already incurred under the congressionally passed budget. If the government doesn’t pay Staples the money that is owed for office supplies that it bought last month, that is a legal default just as much as if it fails to service its bonds.
Perhaps, given the desperation of the situation when the time comes, President Obama could try one of the gimmicks that have been proposed, such as minting the trillion dollar coin or taking the position that the debt ceiling violates the constitution or other laws. These are not attractive options because they would probably provoke a constitutional crisis. So let’s assume that he doesn’t take them.
It seems to me that this then leaves two possible outcomes: either the financial markets fall before October 17 and the Republicans respond by backing down or the financial markets fall after October 17 and the Republicans respond by backing down. Precedents for financial markets forcing such a reversal include the delayed congressional passage of the unpopular TARP legislation in the fall of 2008 and the delayed passage of an unpopular IMF quota increase 10 years earlier. (In the last debt ceiling showdown, in August 2011, default was avoided at the last minute; but the stock market fell sharply anyway, when S&P for the first time ever downgraded US debt from AAA.)
After a remark by Obama about the markets yesterday, some accused him of “scare tactics,” of fanning Wall Street fears for political advantage. The reality is almost the reverse: if Obama thinks like a pure politician, he will let the Republican Party complete the process of committing suicide (suicide by means of binge tea partying). The way to do this would be to wait until October 17 and let the Republicans take the blame not just for a decline in the stock market or for the inconvenience to anyone who has to deal with the government during the shutdown, but – if there is no resolution in time to raise the debt ceiling – to take the blame for the likely result: a second global financial crisis and global recession.
But that would be a very high price to pay for political advantage. Even if the Republicans cave in within a few days after October 17, so as to avert the global recession, by then the creditworthiness of US Treasury debt will have been irreparably harmed. My guess is that Obama thinks it would be much better for the country if the markets were to tank and the Republicans to back down before October 17 rather than after, even though the Tea Party would then live to fight another day.
[I discussed these matters this morning on BBC radio, “US Shutdown Risk to Global Economy,” and Fox Business News, “Who Will Listen to the President’s Warning to Wall Street?” Varney & Co.. One of the Fox team claimed that the stock market has usually gone up in government shutdowns. It turned out that her statistic referred to the subsequent month; in other words the market goes up when the shutdown is ended. In fact it typically goes down during shutdowns, by 2 ½ % in the case of those lasting 10 days or more. It looks to me that this exchange was excluded from the segment posted on the Fox website.]
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