Hospital Administrative Costs Are Highest in the United States



The Commonwealth Fund has sponsored yet another study that concludes that the U.S. health system is less efficient than others. This time, the measurement is specifically hospitals’ administrative costs. As always, it recommends single-payer, government monopoly as the solution. Readers of this blog know that I am not about to defend hospitals’ bloated administrative costs. However, the Commonwealth Fund’s scholars go way off-base when it comes to capital costs:

Differences in how hospitals obtain capital funds also appear to affect administrative costs. The combination of direct government grants for capital with separate global operating budgets—as in Scotland and Canada—was associated with the lowest administrative costs. (Wales has recently transitioned to such a system, reversing previous market reforms.) Hospitals in France and Germany, where direct government grants account for a substantial share of hospital capital funding, have relatively low administrative costs despite per patient, DRG-based billing.

Administration is costliest in nations where surpluses from day-to-day operations are the main source of hospital capital funds: the United States and, increasingly, the Netherlands and England. In such health care systems, the need to accumulate capital funds for modernization and expansion stimulates administrators to undertake the additional work that is needed to identify and pursue profit opportunities.

The authors ignore that these surpluses, in U.S. hospitals, are used to pay creditors. Borrowing money from the capital markets, even if at a preferred coupon because the lender does not have to pay tax on his interest income, is more “expensive” than getting a capital grant from the government, which appears to be “free.” Even if we take into account the government’s interest rate to borrow funds, it will be higher than the private non-profit’s rate. However, that is a benefit to society, not a cost. Because investors must look at the credit risk of each project separately, the cost of capital will be more accurately priced. If the capital budget is funded by government grants, there is no telling how the money gets handed out.

It is not clear how much differences in the apparent cost of capital (and the related transaction costs of raising capital) amount to in the Commonwealth Fund study. They need to be pulled out if we are to make good sense of this international comparison.

himmelstein_comparison_hosp_admin_costs_ha_09_2014_itl_exhibit

Jean Tirole, 2014 Nobel Laureate in Economic Sciences



tiroleThe 2014 Nobel Prize in Economic Sciences was awarded to Jean Tirole of the Toulouse School of Economics. According to Reuters, the prize recognizes Professor Tirole’s work aimed at “taming” private business firms through governmental regulatory interventions and antitrust law enforcement.

That summary is true as far as it goes. Professor Tirole indeed spent much of his career examining the causes and consequences of industrial structure. He helped pioneer the application of game theory to the field of study known as industrial organization, which tries to answer questions such as “why are some industries populated by a small number of large firms, while others are more atomistic, or “what are the performance consequences (in terms of output, prices and profits) of the different industrial structures we observe in cross-section at a point in time or in particular industries over time?”

Although he contributed many scholarly articles to peer-reviewed academic journals, Professor Tirole is perhaps best known for the textbook he published in 1988, titled The Theory of Industrial Organization (MIT Press). That text focuses almost exclusively on “monopoly” and variants thereof, such as collusive oligopoly and vertically integrated production processes. It goes on to consider the impacts of such market structures on product differentiation, innovation and strategies that incumbent firms might adopt to achieve and maintain their dominant market positions to the disadvantage of consumers.

But like many of his contemporaries, Professor Tirole treats policy interventions “intended” to restrain the exercise of market power and to protect consumers against its abuse as being designed and implemented by benevolent “public servants,” who survey dispassionately a nation’s industrial economy, identify and then surgically excise the tumors of monopoly, all with laser-sharp eyes on enhancing social welfare. To my knowledge, he never considered Chicago-school criticisms of economic regulation (showing that regulatory agencies tend to be “captured” by the very firms they supposedly are meant to regulate in the “public interest”) or public choice theories (and evidence) showing that the enforcement of the antitrust laws is deformed by special-interest-group politics.

Professor Tirole should be credited with appreciating that governmental intervention predictably fails if it follows a one-size-fits-all approach, imposing the same rules on every member of a particular industry or, indeed, an economy as a whole. But his later work on credit “bubbles”, the recent global financial crisis and ongoing slow recovery from it demonstrates a pro-government mindset in that, according to Reuters, he traces current economic woes to “insufficient government regulation.” Again according to Reuters, “Tirole himself was cautious on the economic prospects of his country, where unemployment is stuck at around 10 percent and whose leaders last month broke the latest in a series of promises to bring public lending to within EU limits.”

Perhaps the $1.1 million he will receive for winning the 2014 Nobel Prize will afford Professor Tirole leisure time to read the public choice literature, which ought to disabuse him of his evident faith in the public sector’s public-spiritedness.

Federal “Open Payments” Website Stumbles Out of the Starting Gate



cacecb778fc692eb87bd08b7e6e61cc5The federal government has launched an intrusive and mischievous Open Payments website, where payments for consulting and similar services provided by doctors to pharmaceutical and medical-device makers are publicized.

Paul Keckley aptly summarizes the recent data dump from the Centers for Medicare & Medicare Services (CMS):

  • In the last five months of 2013, drug manufacturers made 4.4 million payments totaling $3.5B to 546,000 physicians and 1,360 teaching hospitals to encourage acceptance and use of their drugs/devices: $1.49B for research, $1.02B for ownership interests, $380M for speaking/consulting fees, $302M for royalties/licensing, $93M for meals, $74M for travel, and $128M for “other.”
  • Recipients of 40% of these payments were not disclosed due to data problems (data verification/accuracy) per the Center for Medicaid and Medicare Services (CMS). 190,000 of the 4.4 million payments were for investigational drugs not approved for sale, or for drugs pending approval for new uses.
  • 26,000 of the 546,000 physicians were able to review/correct their data before release (physicians and teaching hospitals were given 45 days to review data, correct inaccuracies before the September 30 release).
  • The biggest drug companies had the most interactions with physicians—the Top Five: Pfizer (142,600), Astra Zeneca (111,200), Forest Labs (98,900), Johnson & Johnson (97,000), and Glaxo SmithKline (85,100).

Mr. Keckley also notes that the Open Payments website is not “user friendly.” No kidding! I spent a few minutes noodling around it and got increasingly frustrated. Morning Consult’s polling data tells us that patients are eager to see how much the companies paid their doctors. Fifty-seven percent “strongly agree” or “somewhat agree” that they will look up payments made to their doctor.

Well, good luck to them. I think that few will pay attention to this after the hubbub settles down, and those that do will be sensationalist journalists and “citizen activists” looking to shake down the companies. There is no evidence that this disclosure will improve the quality of care. It might just as likely reduce quality, as doctors fear getting “shamed” and cut back valuable relationships with manufacturers.

Indeed, just a few days after launching the database, the federal government has disclosed more errors, adding up to about $1 billion:

The federal government’s new database of drug and device industry payments to doctors is even more incomplete than has been reported previously.

In a fact sheet posted online, federal officials disclosed that the database, dubbed Open Payments, is missing more than $1 billion in payments made between August and December 2013. These omissions are in addition to information the government has redacted from the payments it has disclosed, citing inconsistencies. (Charles Ornstein, ProPublica)

Open Payments is fundamentally different than Medicare’s recent disclosure of its payments to hospitals and physicians. Medicare payments are taxpayers’ money, and therefore public property. Consulting fees paid to physicians by private businesses are not.

Plenty of researchers receive government grants to propose increased government control of health resources. Is that not a conflict of interest? If we have to have an Open Payments database, those names and amounts should be included, too.

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For the pivotal alternative to Obamacare, please see the Independent Institute’s widely acclaimed book: Priceless: Curing the Healthcare Crisis, by John C. Goodman.

Fallujah Fallout: Who Pays the Price?



iraqi-child5November of this year will mark the ten-year anniversary of the Second Battle of Fallujah. Fallujah, a city west of Baghdad with a population of over 300,000, is known to have observed some of the most intense fighting during the war in Iraq.

After nearly a decade, the situation in Fallujah is still dire. Militants recaptured the region in early 2014 and the city has once again observed heavy conflict as the Iraqi military and militants fight for control of the city.

As the U.S. reenters Iraq, this region continues to experience the fallout from the previous U.S. occupation. Those most impacted are not members of Fallujah’s supposed “terrorist hotbed,” but those who had not even been born during the time of siege.

It has been suggested that modern weapons make conflict “more humane,” that compared to weapons of the past, the current military arsenal allows for a “civilized” form of warfare. But what is happening in Fallujah illustrates this idea is monstrously fallacious. While past weapons were undoubtedly destructive, modern weapons are not inherently more civilized. In fact, the weapons used in Fallujah and other parts of Iraq may wreak havoc on the citizens of these areas for generations to come.

The U.S. invasion of Iraq saw the introduction of a variety of weapons, including the popular SMAW NE (that’s Shoulder-Launched Multipurpose Assault Weapon. The NE stands for “Novel Explosive”). The SMAW NE is a “thermobaric” weapon. In essence, these weapons use high explosives, reactive metals, and the oxygen within the blast area to generate intense, long-lasting, high-heat explosions. The idea is to completely annihilate the target and the surrounding area, inflicting “maximum damage.” (you can see a video of these weapons here).

To create these blasts, the SMAWs use a variety of fuels, ones that may include, among other metals, radioactive uranium. The DOD has declined to release information about the particular content of these weapons. Through the Freedom on Information Act, however, the International Coalition to Ban Uranium Weapons reported that:

 [U.S. Central Command’s] response claimed that depleted uranium munitions had not been used in [the Second Battle of Fallujah]. However their response also pointed out that no records of depleted uranium use in the city were kept prior to July 2004. This means that, if uranium weapons had been used in [the First Battle of Fallujah] in April 2004, no records of their use would be available.

When SMAWs are fired, the particulate matter from the reactive metals and fuels used to power the weapons (uranium or other) are released into the air, water, and soil. The presence of these metals can cause serious health problems, including a myriad of birth defects.

Since the U.S. invasion of Iraq in 2003, the number of birth defects, infant mortality rate, and instances of cancer have skyrocketed. In Fallujah, studies found that half of all they children surveyed, born between 2007 and 2010, had some significant birth defect. Before the invasion, approximately 2% of children in Fallujah were born with serious birth defects.

Before the siege of the city, approximately one in ten pregnancies in Fallujah ended in miscarriage. Between 2007 and 2010, this number increased to one in six. Similar increases were found in other Iraqi cities where the weapons were used.

Infant mortality rates in Fallujah are now four times higher than rates in the neighboring country of Jordan and eight times higher than in Kuwait (80 of 1,000 births in Iraq end in the child’s death compared to 19 in Egypt, 17 in Jordan, and 9.7 in Kuwait).

As the U.S. starts new operations in Iraq and Syria, it is important to remember that these actions have very real consequences—both anticipated and unanticipated. The “necessary collateral damage” mantra, so often employed by proponents of such actions, fails to understand the gravity of these activities. In many cases, the consequences of current military operations may not be fully realized for decades.

Military intervention is often couched as a means to preserve freedom and release innocents from the evils of terrorism. If our aim is truly to provide others with the best possible quality of life, we must consider whether U.S. actions abroad may impose higher costs on foreign populations than those imposed by ISIS, the Taliban, or some other terrorist group. In this case, the argument for military action becomes far less clear. As the case of Fallujah illustrates, those who pay the highest price for U.S. foreign interventions may be those who are undeniably innocent of any crime, other than they were born in area with those who “threaten U.S. interests.”

A New Obamacare Lawsuit from the Former Top Obamacrat



Obama-FacepalmHere’s one from the “you can’t make this up” files:

The Department of Health and Human Services is in the spotlight for claims it is violating the Affordable Care Act.

The lawsuit was filed by Mehri & Skalet attorney Jay Angoff, who used to oversee ACA implementation for HHS. Filed on behalf of a Missouri consumer advocacy group, the suit claims the federal agency is not following through on its obligation to make rate filings for 2015 publicly available in time for the public to comment on them.

Mr. Angoff “used to oversee ACA implementation for HHS.” He used to run Obamacare. Now, he’s running against it. Here’s why:

There is a tension in the Obamacare coalition. Open enrollment begins on November 15, a week and a half after the election. The current story on premiums for benchmark Obamacare plans in 2015 is that they will go down by just under one percent. This comes from a Kaiser Family Foundation survey of cities in only fifteen states. Notwithstanding serious criticism of this claim, the media have swallowed and recycled it. For obvious political reasons, it is necessary for the Obama administration that no further announcements of premium hikes for the rest of the states disturb this comfortable narrative.

On the other hand, lawyers like Mr. Angoff are eager to see rate hikes in the double digits. Obamacare has funded states to empower their insurance commissioners to roll back premiums on political grounds. Lawyers like Mr. Angoff look forward to a tidy business representing “exploited” consumers in such states.

All Obamacare premiums for 2015 should be announced before the November 4 election, so that voters have the freshest information about Obamacare’s consequences. Whether Mr. Angoff’s lawsuit will have an effect in so short a time, only the judge can tell.

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For the pivotal alternative to Obamacare, please see the Independent Institute’s widely acclaimed book: Priceless: Curing the Healthcare Crisis, by John C. Goodman.

Brazil—Back to Normality



rBrazil’s presidential election has confirmed that, after a few weeks in which environmentalist candidate Marina Silva and her “new kind of politics” turned things upside down, everything is back to normal: the governing Workers Party (PT) is a hegemonic force, the Social Democratic Party (PSDB) is a convenient opposition and, despite the increasing impatience with the current state of the country, the emerging middle class is still more afraid of the past than the future. The current President, Dilma Rousseff, and opposition Senator Aécio Neves will face off in the second round on October 26.

With slightly more than 41 percent of the vote, Rousseff has proved that her administration’s dismal record (an average 1.5 percent economic growth, the loss of one-third of the value of the real, and fifty thousand homicides per year) has not diminished her party’s electoral power. Her support dropped in ten states but rose in sixteen others. Thanks to the fact that under three successive PT administrations per capita income has risen by one-quarter on the back of an initially healthy rate of economic growth, populist redistribution, and an artificial credit expansion, the governing party has managed to retain the loyalty of a large chunk of the emerging middle class and the less fortunate.

Using various tools, the PT has created a power structure that makes it very difficult to dislodge it from the presidential palace of Planalto. They include a vast grassroots machinery based on patronage; the control of Congress by co-opting other parties, especially the parasitical Brazilian Democratic Movement (PMDB); the magic of former President Lula da Silva, the man who handpicked Rousseff as his heir; and, last but not least, corruption, in which the PT is careful to involve many other political actors.

Rouseff is happy to face Neves in the runoff even though the latter obtained a surprisingly high 34 percent. That is why Lula, a major factor in every election, had kind words for him in recent days to the detriment of Marina Silva, the environmentalist of African descent with Amazonian roots who emerged as the candidate of the Socialist Party after an accident took the life of her predecessor. The fact that Silva belonged to the PT until 2010, her discourse based on a “new kind of politics”, her attack on excessive government interventionism, and her unexpected ties to part of the business community made her a powerful social and ideological mix that threatened the governing party’s hegemony. The character assassination aimed at her by the government, facilitated by a proportional distribution of TV airtime that gave the president twelve minutes per day and Silva barely two, had a very clear objective—to boost Neves, a more convenient runoff adversary, at her expense. It worked: Silva came in third with 21 percent of the vote. The government knows that Neves’s elitist image and ties to the business community are an easy target for the PT, which thrives on polarization.

Curiously, the business community shares this perception with Rousseff. Once enthralled with the PT’s moderate left-wing politics, they have become Rousseff’s main critics, fearing that the tax-and-spend policies, subsidies, and controls will keep the economy stagnant for years to come. Understanding that Neves would be an easy target for Rousseff, they had bet on a Silva victory, calculating that she would rest on the support of Neves’s party in the second round and later on as President. The erosion of Silva’s numbers in the polls was therefore met with alarm in business circles recently. The signs—the real‘s loss of value, the stock market decline—were unmistakable.

Is Rousseff’s victory in the second round a foregone conclusion? One never knows, especially taking into account the fact that little less than half of the emerging middle class voted for the opposition and that Neves’s and Silva’s votes add up to more than 55 percent. Silva will probably support Neves, but her powers of endorsement are an open question—she lacks a party and an electoral machine. It is by no means clear that those who voted for Silva in support of a new kind of politics will be more attracted by Neves, whom Rousseff will paint with a polarizing brush as she attempts to frame the election as a choice between going back to the past and preserving the PT’s redistributive programs.

NSA Mission Creep: It’s for the Children



It's for the Children

It’s for the Children

In the aftermath of Edward Snowden’s, and numerous other credible whistleblowers‘ irrefutable revelations that the National Security Agency (NSA) and other government agencies are capturing and indefinitely storing millions of innocent Americans’ phone calls, emails, internet transactions, and even movements and whereabouts at any given time—Apple and other tech companies are rightfully responding to their customers’ demands for enhanced encryption to protect their privacy rights.

The concept of rights is apparently unknown to the nation’s top attorney, who wants the government to continue to be able to capture, store, and peruse at its leisure your private emails, phone calls, photos, etc. In a speech last week:

U.S. attorney general Eric Holder said on Tuesday he was worried that attempts by technology companies to increase privacy protections were thwarting attempts to crack down on child exploitation.

Speaking at the biannual Global Alliance Conference Against Child Sexual Abuse Online in Washington, Holder warned that encryption and other privacy technologies are being used by sexual predators to create “more opportunities to entice trusting minors to share explicit images of themselves.”

“Recent technological advances have the potential to greatly embolden online criminals, providing new methods for abusers to avoid detection,” he said. “When a child is in danger, law enforcement needs to be able to take every legally available step to quickly find and protect the child and to stop those that abuse children. It is worrisome to see companies thwarting our ability to do so.”

Government continually sets up strawmen boogie monsters to provide cover for violating our rights, and it’s time for us to act like adults, not scared little children who need the big strong men to keep us safe.

It’s not to protect us from “German [Japanese/Nazi/Communist] spies,” or “the War on Drugs” or “Terrorists who hate our freedoms,” or even “Sexual predators”: it’s for Big Brother.

Let’s just say No.

Amazon’s “Dark Side” Is a Bright Spot for Workers and Consumers



Amazon-BezoJim Hightower is an old-fashioned Texas progressive, who, if memory serves, once ran unsuccessfully for the governorship of that state. He may be a great polemicist—see “The Dark Side of Amazon”—but he does not know the first thing about how markets work and how Amazon.com, like Wal-Mart, is a benefactor of consumers nationwide and worldwide.

Before the advent of Wal-Mart, rural America was a retail desert. Small shops, limited product availability and, yes, “hometown service”. But the prices of most items were high because the only alternative to shopping locally was to drive to the nearest city or order through the Sears or JC Penney catalog and depend on timely delivery by the US mail in, it was to be hoped, an undamaged package. The downside of local retail shops (limited options and high prices) fell most heavily on low-income households, which may not have had an automobile or could not afford to take time off work to shop at larger urban retailers or even at local merchants, which typically closed at 5 p.m. Wal-Mart solved both problems in one fell swoop.

Sure, local retailers suffered losses of business and some were forced into bankruptcy, but consumers (the only group whose welfare matters in a free market economy) won big-time. Amazon has generated benefits for consumers many times larger than Sam Walton ever dreamt of.

But what about the jobs that disappeared in local retail outlets as Amazon and Wal-Mart drove costs (and prices) down by inventing markedly more efficient distribution networks and negotiating lower prices with manufacturers and other suppliers on behalf of millions of consumers with little bargaining power of their own? An economic system’s chief purpose is to create prosperity (wealth), not jobs. Creating jobs—at the point of a gun, as Josef Stalin proved, or as FDR did by drafting millions of men to shoulder arms against the Axis powers—is easy; creating wealth is not. Prosperity materializes only if existing resources (land, labor and capital) can be utilized more efficiently, squeezing out “waste” and redundancy so that resources can be released from current employments and redirected by alert entrepreneurs to the production of new products that consumers may not even know they want (an iPhone ten years ago, for example) until they become available.

Hightower bemoans the working conditions in Amazon’s warehouses, a few of which literally become sweatshops during hot summer months. I am willing to bet, however, that if the people employed in one of Amazon’s “dehumanizing hives” (his phrase) were asked whether they wanted to quit their jobs, not one hand would be raised, especially so in an economy with an unemployment rate still hovering around six percent and a rate of underemployment twice that figure.

Hightower, like many before him, claims that Amazon’s ability to avoid collecting sales taxes on orders shipped out of state from the company’s Washington state headquarters or from its warehouses located around the United States gives Amazon a tax subsidy ranging “from about 4 to more than 10 percent.” That subsidy, which actually ranges from zero to more than 10 percent (four U.S. states—Delaware, New Hampshire, Montana and Oregon—impose no local or state sales taxes at all), supposedly confers a significant competitive disadvantage on brick-and-mortar retailers, who must remit sales tax receipts to the appropriate state tax authority.

But in making that claim, Hightower ignores taxes paid by FedEx and UPS, which deliver Amazon’s packages to customers’ doorsteps. Those delivery services pay, among others, state and local gasoline taxes and corporate income taxes; their employees pay state and local personal income taxes and spend some of their disposable incomes at local grocery stores and other retail outlets, purchases on which sales taxes are due. So, too, do the owners and employees of Amazon’s warehouses.

Amazon relies increasingly on the U.S. Postal Service to deliver packages to customers’ homes or places of business, especially in rural areas, a relationship that must have been seen by the beleaguered USPS as something like a lifeline thrown to someone going underwater for the third time.

It is true that, like Wal-Mart, Amazon has benefited from tax breaks (“incentives”) offered by local and state governments to lure companies to one particular geographic location rather than another. Handed out to encourage local economic development and the jobs and tax receipts associated with it, such corporate “incentives” are a national scandal, squandering taxpayers’ hard-earned money for dubious benefits. But neither Wal-Mart nor Amazon should be blamed for accepting such incentives, which are offered by politicians who want to claim credit at reelection time for attracting high-profile corporations to their home districts or states. Consumers, by and large, don’t care about the points of origin of their orders, as long as they are delivered when expected, whether from Toledo or Timbuktu.

It is someone ironic, but understandable, that Wal-Mart has joined the chorus demanding that Congress put an end to the sales-tax-free Internet retail environment. Wal-Mart has a physical presence in virtually every state and thus is obliged to collect sales taxes on almost everything it sells. Wal-Mart, of course, would benefit itself by erasing one of Amazon’s competitive advantages. But consumers would be harmed, not only by seeing prices rise by the amount of sales tax Amazon collects and then remits to the treasuries of its customers’ places of residence. Even more seriously, expunging the virtual border between the more than 3,000 separate taxing jurisdictions throughout the United States would mute the interjurisdictional tax-rate competition that makes it politically costly for any one of them to jack up its sales tax rate.

Competition can seem to be ruthless to someone who loses a small business or gets fired from a retail job, but the benefits to consumers swamp the harm done to producers. Already, Amazon is facing threats from Uber and other web-based delivery services that will pick up and deliver orders from local retailers in hours, not one or two days. Amazon could respond by getting permission from government regulators to deliver packages via drones. No one knows what the next new thing will be, but the answer cannot be found by hamstringing Amazon or any other large retailer, but by allowing free and open competition to flourish.

But a mercantilist, anti-market mindset is exactly what one would expect from a progressive defender of the Empire against Sam Walton, Jeff Bezos, and innovative rebels like them.

Debunking Democracy with James M. Buchanan



JamesBuchananAmong the first questions young people ask upon their political awakening is one that should concern Americans of all ages: Why don’t democratic governments operate the way our civic classes taught us? Perhaps no one of his generation thought more deeply about this question than the economist James M. Buchanan (1919–2013). The late Nobel laureate would have turned 95 years old on October 3, and we’re happy to use the anniversary of his birth to publicize his legacy. Last winter, The Independent Review published a six-article symposium on Buchanan’s contributions to political economy and classical liberalism—all of which is now available for free on our website. Christopher J. Coyne, one of our journal’s three co-editors, kicks off the discussion with an introduction that traces Buchanan’s development of new tools to help us better understand how a democracy actually works, as distinct from how we wish it would work.

Buchanan called his approach “politics without romance,” yet he was fully invested in the romantic notion that intellectuals could and should inspire the public to imagine a better political community. Symposium contributors Geoffrey Brennan and Michael C. Munger (another co-editor of The Independent Review) make the case that both branches of Buchanan’s thought—his realism and his idealism—grew from the same root: his emphasis on constitutional rules of order and disdain for the rule of elites. Buchanan was also a moralist: He believed that one of the most appealing major features of a free society was its absence of dominion and discrimination in human relationships. Independent Institute Research Fellow Peter Boettke author of Living Economics, suggests that by stressing this benefit, freedom’s friends would help many people overcome their fear that life without Big Government would entail too many responsibilities for them to manage well.

As with many prolific writers, Buchanan wrote so much over the decades that claims of his consistency are open to debate. Independent Institute Research Fellow Randall G. Holcombe, for example, argues that aspects of Buchanan’s constitutional thought might be at odds with individual liberty—particularly Buchanan’s argument for coercing individuals to support collective actions that he believed were necessary to further their own goals. Also, like other prolific scholars, Buchanan left a huge body of work rich in insights that have yet to be fully mined. Niclas Berggren, for example, believes that Buchanan and Tullock’s seminal 1962 book, The Calculus of Consent, has untapped potential to inspire new thinking to advance the cause of liberty. Finally, Hartmut Kliemt concludes the symposium with a look at the logic of Buchanan’s classical liberalism. Buchanan came to his views, Kliemt explains, because he was a communitarian philosopher who discovered the unanimity rule.

(Readers hungry for more discussions of Buchanan’s thought can find several related pieces on The Beacon, archived here, as well as a review of volume 1 of Buchanan’s collected works. Also, see Buchanan’s insightful essay, “The Soul of Classical Liberalism,” and a response by Dwight R. Lee, in The Challenge of Liberty: Classical Liberalism Today, edited by Robert Higgs and Carl P. Close.)

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[A version of this post first appeared in the September 30, 2014, issue of The Lighthouse. For a free subscription to this weekly newsletter from the Independent Institute, enter your email address here.]

Berkeley’s Free Medical Marijuana Plan Shows Economic Thinking Has Gone to Pot



14448260_S-230x242In 1996, California passed Proposition 215, making it the first state to legalize medicinal marijuana. Its passage, however, did not trump federal law, under which cannabis remains illegal as per the Controlled Substance Act. Due to this illegality on the federal level, private insurance companies, as well as state programs like Medi-Cal, do not cover medicinal marijuana. Thus, many low-income patients are paying significant portions of their income on the drug, expenses that they cannot easily afford.

Attempting to combat this problem is the city of Berkeley. In July the city council unanimously approved an ordinance that will allow low-income persons to receive free marijuana if they have a legal prescription, which is scheduled to go into effect in August 2015. (The program covers individuals with annual incomes below $32,000 and families of four with incomes below $46,000.)

The plan mandates that Berkeley medical marijuana dispensaries give away 2 percent of their product to eligible customers. As Councilmember Darryl Moore put it, “The city council wants to make sure that low-income, homeless, indigent folks have access to their medical marijuana, their medicine.”

Regardless of the merits of medical marijuana, the ordinance as written is emblematic of a problem that plagues many safety net programs: the creation of perverse incentives. This particular plan encourages low-income residents to earn lower incomes in order to qualify for the giveaway. It also takes a toll on an industry that contributes a disproportionate share of the city’s taxes.

The arbitrary income cut-off of $32,000 means that participating patients who earn slightly less than this amount would receive significantly more effective income than those who earn at least $32,000 but who would lose out on the benefits of the free medicinal marijuana. This is what economists mean when they say that low-income citizens pay higher “marginal tax rates” than wealthy Americans, even with an effective tax rate close to 0 percent. They would lose money for every marginal dollar earned that eliminates them from receiving benefits that have income cut-offs.

This problem is prevalent in many poorly designed government safety nets, and is also the reason that many programs use phase-outs to lower the marginal tax rate. Phase-outs mean that earning more money above the income limit would, for example, simply lower the amount of free marijuana that one receives until it is gradually reduced to none. Although phase-outs do not completely fix the problem, they are a better option than a single fixed cut-off.

A second problem has to do with the arbitrary quantity of medical marijuana that the government would require dispensaries to give away: in this case, 2 percent of their product. This is poor policy for two reasons. First, it creates a “cross-subsidy,” which means that the price for paying patrons of the dispensaries will rise in order to cover the loss of profit on the 2 percent of free marijuana. Second, it provides a disincentive for dispensaries to locate their business in Berkeley. The dispensaries could respond by moving to nearby Richmond or Oakland and avoid the loss of sales revenue from providing a free product, which would mean that the city of Berkeley would not receive tax revenue from this heavily taxed drug, and that the intended beneficiaries of the ordinance would not receive the free marijuana as the nearby cities do not have similar laws requiring the free distribution of the medicine.

The Berkeley City Council wishes to see itself as providing a valuable benefit to low-income residents. Unfortunately, its medical marijuana plan has many basic economic problems—blunders that regrettably still exist in many government programs today.

[Ryan Atkinson is an economics major at UC Berkeley and a former intern at the Independent Institute.]