The Independent Institute


Education Results, Not Spending Rankings, Count Most

studyingTomorrow marks one of education’s most important  rituals: the annual release of Education Week’sQuality Counts” report, which grades states on several criteria including spending. If history is any indication, howls about “underfunded” public education are sure to follow. In fact, by my tally at least a dozen states all claimed to be 49th in K-12 funding in 2015 alone, about the same number as 2014, depending on the ranking and the methodology used.

The reality is total public elementary and secondary school spending now amounts to $635 billion. If that kind of spending represented market value, public K-12 education would rank second only to Apple valued at $725 billion and far ahead of ExxonMobil and Microsoft, each with a market value of more than $300 billion.

The trouble is, annual spending rankings tell us virtually nothing about how much value students and taxpayers are receiving for what we’re spending.

Right now, for instance, total per-pupil spending averages more than $12,000 nationwide. Yet alarmingly small numbers of students are doing well in reading and math based on combined proficiency rates from the National Assessment of Educational Progress (NAEP), also known as the Nation’s Report Card.

Unpopular Individual Mandate Fails to Make People Buy Insurance

healthcare reformJust before Christmas, Congress voted to deficit fund Obamacare by imposing moratoria on a number of Obamacare taxes that are unpopular with interest groups. Left in place was the unpopular individual mandate to buy health insurance, which has no organized interest to lobby against it. Nevertheless, it is the most unpopular part of Obamacare.

The New York Times reports that a number of relatively high-income earners are choosing to remain uninsured, or even drop Obamacare coverage, and pay the fine instead:

Rachel Kulus, 46, opts to keep antibiotics in her medicine cabinet rather than buy health insurance through the California exchange.

“I do not believe it serves the public good to entrench private insurance programs that put actual care out of reach for those they purport to serve,” she said.

Ms. Kulus, who works for a small marketing firm outside San Diego, paid about $300 a month for an exchange plan. But when she injured her back and wanted physical therapy, she was offended to learn she would have to pay for it in full because of her plan’s $6,000 deductible.

“I just went on YouTube and tried to figure it out on my own,” she said. She added that her auto insurance included personal injury protection, so “anything catastrophic will hopefully happen in the car.”

Ms. Kulus estimates that she will pay a penalty of $750 for flouting the individual mandate last year, and $950 in 2016.

(Abby Goodnough, “Many See I.R.S. Penalties as More Affordable Than Insurance,” New York Times, January 3, 2016.)

People’s willingness to swallow the penalty is driven by the fact that the plans are not worth the money. Plus, if they get sick they can enroll without penalty at the next annual open enrollment. (This is something they could not do in the pre-Obamacare individual insurance market. In most states, if they became sick, they would have been charged a much higher than standard premium.)

Barack Obama: Firearms Industry’s Best Friend

Gun ControlFor several years now, President Obama has been threatening to crack down on gun sales and gun ownership, and the result has been... more guns. As this article notes, the firearms industry is booming (pardon my phraseology), largely because of the president’s anti-gun rhetoric. Surely a man as perceptive as President Obama can see that despite his rhetoric, his actions are responsible for putting more guns in the hands of more people.

Meanwhile, what the president is actually proposing would not limit the availability of guns to the people he says shouldn’t have them. And, it won’t make our communities safer, despite his claims. He wants to broaden background checks, better track illegal firearms trafficking, and improve reporting on guns stolen in transit from manufacturers and dealers, but what are the problems here? The shooters at Newtown, Aurora, Roanoke, Charleston, and San Bernardino all used firearms legally bought after background checks.

His statement notes, “The National Firearms Act imposes restrictions on sales of some of the most dangerous weapons, such as machine guns and sawed-off shotguns. But because of outdated regulations, individuals have been able to avoid the background check requirement by applying to acquire these firearms and other items through trusts, corporations, and other legal entities.” The reason people buy machine guns, sawed-off shotguns, and silencers through corporations is that it is illegal for individuals to buy them. Individuals have to set up a trust or corporation to own those weapons, according to federal law. A sensible way to make the change the president suggests is to allow individuals to buy those firearms just like they buy rifles and handguns today, and they would be subject to the same background checks. I am pretty sure this is not the policy the president has in mind.

Paying for Drugs: Long-Term Benefits vs. Short-Term Costs

PillsPwC has published its predictive Top Health Industry Trends for 2016. It is enthusiastic about the uptake of mobile and telehealth technologies, and consumerism in health care. Overall, the report is both interesting and uncontroversial.

However, there is one datum, from a consumer survey, which is hard to figure out. PwC asked consumers about paying for drugs, and found that “more than half of consumers would be willing to pay the cost of a drug over time instead of all at once.” The actual proportion was 53 percent; 17 percent were not willing, and 30 percent were not sure.

The question is hard to understand. We pay for a prescription every time we fill it. If we have a chronic illness that requires taking medicine for a long period, we do not pay for it “all at once.” Nevertheless, there is a “question behind the question” that is lurking here: How would you prefer to pay for one pill that could cure years of illness?

The obvious answer is to pay over a long period of time, while obtaining the benefit now. This is how we should pay for expensive drugs like Sovaldi, which effectively cures a type of Hepatitis C. When it first came out in 2013, it cost $84,000 for a 12 to 24 week course of treatment. However, it eliminated hundreds of thousands of dollars of treatments, including liver transplantation, for patients with previously incurable Hepatitis C.

The Reconciliation Distraction

AffordableCareActJust three weeks after voting $40 billion of deficit financing for Obamacare, which was cheerfully signed by President Obama, Republican Congressional leaders are returning to the reconciliation distraction.

Instead of actually proposing an alternative to Obamacare, Republican Congressional leaders believe they can continue to convince us they are committed to repealing and replacing Obamacare by executing various parliamentary gymnastics that give the illusion of action.

The Congressional Budget Office estimates the reconciliation bill (H.R. 3762) would cut $1.4 trillion of Obamacare spending, mostly on payments to health insurers via Obamacare’s health insurance exchanges, for the ten years through 2025. It also cuts $1 trillion of Obamacare taxes, for a net increase in the deficit of a little less than $400 billion. It does nothing to Obamacare’s federalization of the regulation of health insurance.

That is all to the good, except for one thing: President Obama is guaranteed to veto the bill if Congress passes it. What is the point?

Ryan Gosling’s Shorts

bigshottrailerThe new film “The Big Short”–based on the book by Michael Lewis–achieves what I would’ve thought impossible: it makes an American audience root for speculators hoping to make millions betting against the U.S. economy. Ryan Gosling, Christian Bale, Brad Pitt, and Steve Carell are the Hollywood stars portraying the real-life people who had realized U.S. housing was in a bubble, and that the mortgage-backed securities based on them were much riskier than most people realized.

To be sure, the movie gives the impression that the commercial lenders, Wall Street investment banks, and ratings agencies (Moody’s, S&P, Fitch) were infested by rogues who needed stricter government regulation. In that respect, I disagree with the message; I think it was sins of government commission that blew up the housing bubble. In particular, the Fed’s easy credit fueled the boom while various federal programs steered funds into housing.

Economics and Resolutions

resolutionsJohn Maynard Keynes, perhaps the most influential 20th century economist, once wrote that economics “is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw correct conclusions.” In other words, economics offers principles to help us make fewer mistakes.

Given that many make New Year’s resolutions in an effort to improve their lives, it is worth considering some economics principles that provide to aid that effort.

Economics does not provide everything necessary for wise choices. It does not provide the required facts or judgments. In fact, pervasive uncertainty means it does not generally tell us the “right” choice, since different options will turn out to be best in different circumstances. Rather, its principles typically teach about mistakes to avoid.

Economics can be defined as the study of the consequences of scarcity—what we desire (including for others we care about) will always exceed what we can produce.

Douglass C. North (November 5, 1920 – November 23, 2015)

northI met Douglass C. North exactly forty-eight years ago, during the final week of 1967, when the American Economic Association was holding its annual meetings in Washington, D.C., and I went to Doug’s room at the Shoreham Hotel to be interviewed for a faculty opening at the University of Washington, where he was chairman of the department of economics. I still recall that meeting. I knocked on the door, Doug opened it, grasped my extended hand, and nearly dragged me into the room with the words, “You’re Bob Higgs, and we’re very interested in hiring you.” Needless to say, this reception was not the sort that a nervous, 23-year-old job candidate expected as he trudged from room to room to recite what his dissertation research was about and to answer all sorts of questions posed by faculty members from the hiring institutions. But Doug did not do business in the usual way, and his capacity for venturing beyond the usual modes in conducting faculty affairs—as when he offered me the job over breakfast the next morning—or in thinking about economic history played important parts in the great success that he enjoyed during his long professional life.

Others (see here and here) have presented the main outlines of Doug’s career—degrees earned, positions held, books and articles published, professional honors attained—and I will not duplicate those particulars here, but rather offer a few remarks about a man who not only hired me for my first professional job, but mentored me (sometimes making me quite angry in the process), assisted my professional development, and worked closely with me and several other economic historians during the fifteen years that I spent as a faculty member at the University of Washington, where at that time one of the world’s preeminent graduate programs in economic history enjoyed its golden age. (Doug and I both left the UW in 1983.) I plan to write about Doug at greater length for a future issue of The Independent Review.

When I met Doug, I already knew a fair amount about his work in American economic history, where he had established himself as a leader in the Cliometric Revolution, a development that began in the late 1950s in which economic historians trained as economists largely replaced those trained as historians, at least in departments of economics where economic history continued to be offered in courses and as a field of specialization for graduate students. Doug’s leadership in this movement was not without irony, however, because the hallmarks of cliometrics—use of explicit, often formally specified neoclassical economic theory and econometric testing—were not much in evidence in Doug’s own writing, which continued to be more literary and old-fashioned in its exposition, albeit often focused on the programmatic desirability of applying economic theory and of developing new theoretical frameworks that went beyond the standard neoclassical stipulations. In this way, Doug was always more an exhorter than an exemplar, more one who wrote about what economic historians should do, rather than one who simply conducted substantive research that put the new approaches on display and thereby demonstrated their power to explain historical events more effectively.

Third-Party Bureaucracies Can’t Discipline Healthcare Prices

drcalcOne of the least substantiated notions behind the modern American doctrine that people should allow insurers or governments to control our health spending is that these third parties can negotiate fees with hospitals and physicians that are better than those which would prevail if patients controlled these dollars ourselves.

Years of evidence show that these third parties have little idea what they are doing when they fix fees paid to providers. Atul Gawande, MD, has made a name for himself by popularizing research from Dartmouth University, which shows large, unexplained, variation in cost and outcomes for Medicare in different areas of the country. President Obama has used this research to impose further controls on how Medicare pays hospitals and doctors, in the hope that this will reduce costs to the lowest-common denominator.

Unfortunately, new research demonstrates we have no real idea why this unexplained variance exists. This research uses a new database of extremely rich data from a consortium of the nation’s largest private insurers. The database includes over one-quarter of people with employer-sponsored benefits. The findings:

  • There is huge variance in actual hospital prices paid by insurers – up to twelve times.
  • There is little connection between prices for individual procedures in an area and total cost per patient (suggesting there is substitution from high-priced to low-priced procedures within an area).
  • There is no correlation between total spending per privately insured patient and Medicare patient.

The last one is the real killer of the idea that the providers are responsible for driving cost up. If high Medicare costs were driven up in areas with especially greedy and cunning hospitals and doctors, we’d expect private insurers to pay more in those areas, too. On the other hand, some have insisted that where Medicare payments are too low, costs are shifted to private insurers to make up the total required revenue. If that were true, there would be a negative correlation between Medicare costs and private insurers’ costs among regions.

Good economic theory and business strategy indicates providers segment their markets and charge the profit-maximizing price in each segment. So, if prices and costs are a crazy quilt across the country, it must be due to idiosyncrasies among the payers, not the providers.

I don’t actually see the point of worrying too much about price or cost variation. If an orange costs much more in Alaska than Florida, we do not seek government intervention to equalize the prices. Similarly, the cost structure of delivering health care differs for many reasons. What worries me is that this line of research will lead to yet more government efforts to harmonize prices and quality across the country, instead of freeing patients to make their own decisions about how much to pay for health care.

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For the pivotal alternative to Obamacare, please see Independent Institute’s book, A Better Choice: Healthcare Solutions for America, by John C. Goodman.

French Doctors Lose Strike Against “Free” Health Care

CopayAfter a long and arduous fight, French politicians have approved a law abolishing patients’ upfront payments to physicians, which was a promise of President François Hollande’s Socialist Party.

Currently, patients usually pay about £23 ($25) when they see a general practitioner. However, some of this fee is reimbursed by the national health scheme or private supplemental insurance. I suppose the closest comparison to the United States would be Medicare and Medicare supplemental (Medigap) insurance.

The Socialist Party promised eliminating this co-pay would increase access to care. Remarkably, it is doctors who resisted:

...... hundreds of doctors took to the streets and went on strike over recent months to protest against it. They fear they will have to handle more paperwork to get paid by the public and private health insurance funds, with some doctors’ unions describing the reform as a “Sovietization” of medicine.

Perhaps these French doctors have a better understanding of health economics than their American colleagues. The American Medical Association, for example, supported the Affordable Care Act, which gave us a greatly expanded Medicaid program. Medicaid, a joint state-federal welfare program, offers coverage to low-income Americans. Those patients pay nothing directly. On the other hand, they have poor access to care because Medicaid fees are low.