Creating a Public Option

In all of the talk about a public option for health care, there has been precious little information about exactly what this would consist of or how it would be set up. As Ross Perot observed in 1992, the devil is in the details.

Supporters of the public option insist that it will be separate from Medicare (it had better be - Medicare is about to go broke), that it will not receive public funds, and that it will be more efficient than private insurance. This means a new government agency. This also makes it impossible to say that the new agency will not get government funding.

First, let's assume that it starts modestly. The Democrats has given figures of anywhere between 30 and 48 million. Let's assume the lower figure and go with 30 million. Let's also assume that the public option is competitive and offers prices in line with other insurance companies so we will give them 20% of the uninsured and none of the people who are already insured. That's 6 million people. That's a good number for a state but not so good for the entire nation. To put it in perspective, Blue Cross f Western Pennsylvania has 1 million enrolled. Even so, it would have an income in the billions.

So, we now have an agency that insures 6 million people across the entire country. Except we don't have an agency yet. We have to hire people and open offices. That's going to be a minimum of one office per state, probably more if big states. Then there will be one main office, probably in the greater DC area. The new company will need actuaries, adjusters, computers, web sites, clerks, and lots of bureaucrats. That's before it gets its first premium in.

Normally you start companies small by attracting investors. The successful ones grow. The unsuccessful ones go out of business. Not this one. Our hypothetical government agency will start moderately large but too small to cover its expenses. On the other hand it can't fail. The government will not let it.

This will take a big infusion of capitol. The new agency will have to buy everything that it needs and have enough cash reserves to start making payouts the day it goes into operation (remember, no exclusions for pre-existing conditions).

Some of the undefined details become very important here. Will this new agency be expected to repay the government the money that was used to start it? Will it use its revenues to create its own fund for paying benefits? Will it be held to the same standards that private insurance companies are? If it loses money then will the federal government cover its losses?

If any of these questions are answered no then the administration is lying when it says that the new agency will not be taxpayer-funded. This is a slippery question because repaying the money used to create this agency will raise its costs and make it harder to compete. The natural inclination for the bureaucrats will be to have over a pile of money with vague promises about repaying it in the future, promises that will never be fulfilled.

Even if you believe that non-profit government agencies are more efficient because they don't have to pay out profits, a new agency like this would be expected to lose money for years before it stabilized. If the public option is created then it will be a decade or two before we really know what we got for our money.

There is also the question of how the government will handle it if this agency makes money. Will it simply roll over the surplus and lower rates the next year? Will it add the profits to its reserve? Will the profits go to paying back the startup costs? Or will the money go into the general fund?

A related question is how the agency's reserve fund will be handled? All insurance agencies are required to have one by law. This is used for payoffs when claims are higher than premiums. Our new agency will start with a reserve provided by the taxpayers but after that the amount will fluctuate. Will it simply keep the reserve as cash or will it try to invest any excess? Keep in mind that government agencies don't invest, they buy bonds which can only be redeemed through taxes (or by printing money). Social Security and Medicare have deeply "invested" in bonds and paying them back is a crisis waiting to happen.

One of the iron-clad laws of government is that once an agency comes into existence it cannot be abolished. By the time we've determined if this will be a good investment or not it will be far too late to remove.

Glenn Beck and Republicans

There has been a recent debate between conservatives about how they should regard Glenn Beck and other conservative personalities. One side applauds their success, the other is appalled by their antics. Some of this exchange has been hosted at Front Page Magazine which is run by a David Horowitz, Glenn Beck supporter.

The anti-Beck people feel that he is too polarizing and too far to the right. They want a non-threatening Republican party that will attract moderate swing-voters. To them, the Republicans have been losing ground because their message is too focused. Limited government does not attract enough votes. Beck and the others are too shrill and often make mistakes which discredits their side.

The pro-Beck people look at his success in forcing out some of the most ideological members of the Obama administration - people like Van Jones and groups like ACORN. They also support the idea that the Republicans need to stand for something.

So, how do we make sense out of all this?

First, let's admit that Glenn Beck and company are a two-edged sword. They are conservative but they are not automatically Republican. The Tea Party protesters are almost as mad at Bush as Obama. Both presidents pushed unsustainable spending. Some Republicans who tried to co-opt the Tea Parties have been told that they are not welcome. During last year's primaries, Beck, Coulter, Limbaugh, and others made it clear that they were unhappy with John McCain. The fact that these personalities have so much influence but are uncontrolled by the Republican party makes many Republicans nervous. With good reason.

But the question is if the Republicans are better or worse off because of these people. This is a more complicated issue than the anti-Beck moderates make it out to be.

As I said above, the moderates want to appeal to the swing-voters. They want to silence or, at least quiet, the far right who they think scares the swing-voters. They think that the secret to regaining control of Washington is to act as a loyal opposition, trying to moderate the Progrssives' excesses rather than opposing them. There are some severe problems with this strategy.

The first is that it assumes that the Progressives are correct and that the country has moved to the left. These people are trying to move the center to match the new realities. Are they correct in this assumption? The polls don't show it. Also, the idea of playing to the middle was originally proposed by George W. Bush and followed up by John McCain. Bush referred to it as Compassionate Conservatism. Outsiders called it big-government Republicans. It was not particularly successful. Bush lost the popular vote in his first race and won a narrow victory in his second against second-rate opponents.

The 2008 election showed some of the stress lines that this strategy has caused the Republicans. Many conservatives stayed home rather than vote for big-government McCain. Others were not excited about his ticket until he added Sarah Palin to it. Most telling, many Libertarians supported Obama, expecting him to be a pragmatic moderate. I've complained many times that, any time the Democrats can campaign as the party of fiscal restraint, the Republicans have lost their way.

So, the assumption that appealing to the middle and abandoning the principles of Reagan will win elections has not worked very well.

This brings me to the other big problem with the anti-Beck people - demographics. Polls show that the younger voters are far more liberal than the last generation. You can argue, and many have, that this means that the Republicans need to moderate their message in order to attract more younger voters. This is a losing strategy for the reasons I gave above. The Republicans will never win a bidding war against Democrats for more public spending.

The long-term solution is to reach out to the younger generation and start building a new conservative movement. Explain why big government is inherently inefficient and why giving too much control to the government means a loss of liberty. This takes the sort of theatrics that Glenn Beck does. It takes loud, noisy protests. It takes the sort of tactics that the Democrats have been using for decades.

The choice comes down to these two possibilities - move the Republican party to the left or try to revitalize the right. Moving to the left is easy and decorous but it means abandoning many core principles. Revitalizing the right is tougher but has the advantage of a hard-left administration to contrast with. Both options are risky and they are mutually exclusive. Cutting off Beck and the noisy right could result in a new third-party. Embracing them without attracting new outsiders could doom the party to permanent minority status.

Personally, I want the Republicans to stand for something again. I rolled my eyes during most of Bush's deficit budgets and was in shock after the TARP and the other bail-outs. I want to see someone speaking up for limited government and fiscal restraint again.

I don't agree with a lot of what Glenn Beck says but I think that he needs to be given at least as much leeway as the left has given its over-the-top personalities. No one on the left complains about Keith Olbermann and Al Franken was elected to the Senate. We need Beck, Limbaugh, and the others in order to build a new conservative movement and to keep it honest.

Economics for Krugman

Last week, Paul Krugman wrote a column on how economists got things so wrong. He got a few things wrong himself.

First there is the ketchup quote:

Larry Summers, now the top economic adviser in the Obama administration, once mocked finance professors with a parable about "ketchup economists" who "have shown that two-quart bottles of ketchup invariably sell for exactly twice as much as one-quart bottles of ketchup," and conclude from this that the ketchup market is perfectly efficient.

I'm not sure if the original problem here is with Summers or Krugman but Krugman quotes it more than once in his article. There are several problems with this example of market economics.

First, a two-quart bottle of ketchup invariably sells for less than two one-quart bottles. This reflects economies of scale and per-unit costs. As portions become smaller, the cost of packaging, transportation, and shelf space take up a larger proportion of the cost.

Second, supermarkets have been investing heavily in marketing research for decades. What ever price a bottle of ketchup has, it reflects a lot of calculation and experience on the most profitable point. Supermarket prices don't just happen. Krugman thinks that market-based prices arrive at the wrong prince. While they can, and did with the housing bubble, the vast majority of the time they are correct.

Krugman's second problematic example is with a babysitter co-op:

I like to explain the essence of Keynesian economics with a true story that also serves as a parable, a small-scale version of the messes that can afflict entire economies. Consider the travails of the Capitol Hill Baby-Sitting Co-op.

This co-op, whose problems were recounted in a 1977 article in The Journal of Money, Credit and Banking, was an association of about 150 young couples who agreed to help one another by baby-sitting for one another's children when parents wanted a night out. To ensure that every couple did its fair share of baby-sitting, the co-op introduced a form of scrip: coupons made out of heavy pieces of paper, each entitling the bearer to one half-hour of sitting time. Initially, members received 20 coupons on joining and were required to return the same amount on departing the group.

Unfortunately, it turned out that the co-op's members, on average, wanted to hold a reserve of more than 20 coupons, perhaps, in case they should want to go out several times in a row. As a result, relatively few people wanted to spend their scrip and go out, while many wanted to baby-sit so they could add to their hoard. But since baby-sitting opportunities arise only when someone goes out for the night, this meant that baby-sitting jobs were hard to find, which made members of the co-op even more reluctant to go out, making baby-sitting jobs even scarcer. . . .

In short, the co-op fell into a recession.

The analysis that Krugman gives is flawed at every level.

First there is the reason that people hold a reserve of 20 coupons. He says that it is so that they can splurge at a future date. I suspect that it is so that they can quit at any time. The rules of the co-op almost mandate a 20-coupon reserve. You are given 20 coupons when you join and you have to return 20 when you leave. Anyone who allows their reserve to fall below 20 is in debt and will have to earn the difference in order to quit. A different way of looking at this is that you start with a balance of zero but a credit limit of 20 which have to be repaid when you quit.

But that's only part of the problem. The other problem is that this is being presented as a closed system when there are external factors.

Any parent can tell you that it isn't much trouble to watch someone else's child along with your own. It does not double your work, especially if the child that you are sitting is close enough in age to play with your own children (remember that everyone in the co-op has children by definition).

On the other hand, going out represents an additional expense. Dinner and a movie will cost at least $40. So, in order for you to get babysitting work from me, I have to spend an additional sum.

Most people do not send their kids to the sitter every night or even every other night and go out. On the other hand, any parent who is not going out is available to babysit. Since the co-op was established with the expectation that the demand for coupons would balance the demand for sitters, it was doomed from the start.

Also, the prices (coupons) were fixed from the start by the co-op so this example has no place in a discussion of market-based economics. There is no market here. If anything, this is an example of why having prices set by an external authority does not work. Also, if it is hard to find work as a sitter then that makes it harder to repay the 20 coupons when you leave.

This should be obvious to a Nobel-Prize-winning economist but Krugman missed it. He just dismisses it as a recession. He goes on to say:

Freshwater economists are, essentially, neoclassical purists. They believe that all worthwhile economic analysis starts from the premise that people are rational and markets work, a premise violated by the story of the baby-sitting co-op. As they see it, a general lack of sufficient demand isn't possible, because prices always move to match supply with demand. If people want more baby-sitting coupons, the value of those coupons will rise, so that they're worth, say, 40 minutes of baby-sitting rather than half an hour — or, equivalently, the cost of an hours' baby-sitting would fall from 2 coupons to 1.5. And that would solve the problem: the purchasing power of the coupons in circulation would have risen, so that people would feel no need to hoard more, and there would be no recession.

Since the demand for babysitting has an external element, price adjustment will only have a marginal impact. Worse, it would encourage hoarding, at least above the 20-coupon level, since it might take you two evenings of sitting to make up for one night out.

In a normal market, only a subset of the population provides babysitting and they do it for real money instead of hours. The idea of the co-op was to remove the expense of babysitting from the cost of going out. The system that was set up did that admirably. Anyone who needed a sitter would find a large pool of people available. If you stop there then it was a success. It only becomes a failure if you expect an equal number of people to need a sitter and to want to sit. In a population where there was a high demand for sitters and low cost for needed them then this would work. Among a normal population it will always fail.

One final note - any attempt to fix this "recession" is likely to make it worse. There is no way to adjust the co-op rules so that the demand for sitters will match the demand for children to sit. So much for "government" intervention.

"You Lie!"

During last night's speech, when President Obama said that illegal immigrants would not be covered by his proposed health care reform, Rep. Joe Wilson burst out with "You Lie!".

First, this was not appropriate behavior. There was enough of that during the Bush years.

But, what prompted Wilson's outburst? This is where things get tricky. The various health care bills do say that immigrants are not covered but there is no verification. In fact, Republicans have tried to add a verification requirement and the Democrats have rejected it. This means that illegal immigrants probably get coverage even if they are not entitled to it. Obama must know this so he was being disingenuous when he said that they would not be covered.

Obama was disingenuous about other facets of the bills. He continues to claim that early testing will cut costs and save lives. He is only half right there - it will raise costs. He has moderated his promise that the bills will not force individuals or their employers to change coverage but the new taxes and mandates in the bills will certainly force changes.

Regardless, the middle of the President's speech is not the time to argue fine points.

Update - I still think that this outburst was unseemly but it may turn out to be the point where Obama lost the health care debate. The evening news top story was about Wilson instead of Obama. The same thing happened in July when Obama gave a press conference that was mainly about health care but answered one question about a white cop arresting a black professor. Everyone forgot about the rest of the press conference. The same thing seems to be happening - Obama gave a prime-time speech which contained nothing new and was upstaged by two words from the gallery.

Wilson got some action, also. Democrats promised to include some enforcement language in the bills.

What Does Health Care Reform Mean to You?

Forget President Obama's speech. The important details are in the bills working their way through Congress. Forbes analyzes them here. The quick summary is that these bills are awful. Congress realized that they will never pass a bill that adds a trillion dollars to the national debt. They are pledged to come up with a bill that is "deficit neutral".

How can you increase health care coverage without decreasing costs and still call it deficit neutral? By taxing everything in sight.

For example, if you get good health care benefits now (more than $8,000 per individual or $21,000 per family) then your insurer will be taxed a 35% excise tax. Does anyone seriously think that this will not be passed on to the insured or that it will not result in a cap on insurance benefits? So much for promises about not forcing you to change coverage.

There are other new taxes. Drug companies will be taxed $2.3 billion per year divided by their market share. Medical device companies will also be taxed this way. These taxes are designed to be passed on as increased costs so that private enterprise will take the blame instead of Obamacare. At the same time, new incentives will force people to sign up for the public option. It will not be forced on people but it will be the only show in town.

Small businesses will be hit hard. I would not say that the Democrats are planning this but they probably aren't losing any sleep over it, either. Since FDR, Democrats have preferred dealing with a few large companies rather than many small ones. It is easier to control an unionize large businesses.

This health care plan must be scrapped. It takes the worst of the current system and make it even worse. This will be a disaster for the country if it passes.

What Does the Van Jones Resignation Mean?

A funny thing happened over the weekend. Around midnight on Saturday one of President Obama's advisors resigned. Most people never heard of Van Jones until his resignation and most are probably a little confused about why he resigned. The official story is that he used a bad word when describing the Republicans and signed a petition. People on the far left, such as Keith Olbermann-watchers, think that he was the victim of a smear campaign by Glen Beck and others on the right. Olbermann posted on the really-far-left Daily KOS, declaring war on Glen Beck.

What really happened was that Glen Beck and others had spent days digging up embarrassing details about Jones's political beliefs. He is very radical.

The liberal reaction is mixed. Alan Colmes insists that Jones gave up his radical ways nearly ten years ago. He ignores the fact that most of the quotes and positions that have been used against Jones were made after 2000. One clip that Beck ran several times was from early this year.

David Sirota at Huffington is upset because someone from the Progressive movement was forced out. He attributes it to racism and worries about the chilling effect that the resignation will have on progressives who want to go into politics.

These people and others on the left are missing the larger point - that Jones's beliefs may be typical of the progressive movement but they are at odds with the typical American voter. Jones spent the 1990s as a radical communist and never moderated his position very far. Someone who flirted with Deep Ecology (these are code words for "most humans must die") was a special adviser to the President on green jobs. Colmes and the others don't see anything unusual about this. They occupy an echo chamber where everyone is a radical.

This has happened before. Many of Obama's friends and associates are radicals. When they are found out then they are pushed away from the President's inner circle but the big question remains - what sort of man associates with so many radicals?

The School Speech

On one hand, this should be a no-brainer. The President of the United States plans to give a speech to school children urging them to stay in school and work hard. Who could object?

But there is another angle. A beleaguered president, the day before he addresses the joint houses of Congress in an effort to save the signature issue of his presidency gives a speech to school children. The accompanying lesson plans suggest that teachers have the students write about the problems facing the president and how they can help him. Is there any chance that their response will not be politicized?

The Obama administration did admit that the lesson plans were heavy-handed and released revised ones urging students to work on their own, personal goals instead of the President's.

Considering that teachers are one of the Democrats' strongest supporters, I will be amazed if a lot of teachers don't ignore the revised lesson plan and come home urging their parents to support the president.

And that's why people object.

Update:
I read an advance transcript of the speech. It was long, boring and over the heads of most children.

Health Care and Burning Houses

it is becoming common for left-leaning columnists to dismiss complaints about the public option for health care by comparing it to the fire department. Nicholas Kristof is the most recent to make this comparison. According to this argument, we are happy allowing the government to run the fire department so why not let it run health care? There are four major problems with this apples to oranges logic.

1) You can use this to justify a government takeover of everything. If you trust the government to put out fires, why not trust it to run your supermarkets/banks/TV stations? Reasonable people agree that there has to be some limit to government intrusion into people's lives. Otherwise you end up with Communist Russia which was a failure.

2) Buildings are at fixed locations, people move. Having a single location that will handle fires for a given area makes economic sense. On the other hand, people move all the time and their location has no relation to their insurance carrier. There are other major differences. Fires constitute an emergency. Insurance coverage may involve medical emergencies, but it is paid long after the fact. Geography makes it difficult for rival fire companies to compete but this does not apply to insurance companies.

3) There is no good reason why fire departments are government-run. The historic reason is that steam-powered pumps and horses were expensive. These days, fire departments could easily be outsourced if they weren't heavily unionized. Look at UPS and other delivery services which are slowly killing the US Postal Service.

4) I've been saving the best for last - fire departments are run by local government but the public option will be run by the federal government. There's a big difference in accountability between the two. What do you think the reaction would be if the Obama administration proposed a federal takeover of fire departments? The original question treats all levels of government as a single unit. If you correct for that then the question is: "You don't object to allowing your local government run your fire department so why not let the federal government run health care?" Not half as persuasive when you put it that way, is it?

Numbers Games and Health Care

There are some numbers in the health care reform proposal that should be debated but are not even part of the discussion. The idea of universal coverage is that everyone who is not already insured will be required to purchase insurance. Since employer-provided insurance is cheaper than individual insurance, the government will assist those families that need help. The issue is at what level will we provide help?

First, remember that the actual poor are already covered by Medicaid. The people we are talking about are employed and making good wages. The earnings levels I have seen suggested are $66,000, $88,000 and $110,000 per year for a family of four. To put it into perspective, I checked the census data for 2006 (the most recent available). If your family makes $110,000 per year then you are in the top 20% of wage earners. 80% of the country makes less than that but that 80% will be expected to help you pay your insurance. Think about that for a minute.

Now think about this - what happens if the percentage of families buying their own insurance goes up? What if people decide that they will take the amount that their employer now spends on insurance as pay then uses that plus government assistance to buy their own insurance? Is it possible for everyone to subsidize everyone? Picture a large group of people in a circle. Each one is to take $100 dollars from his pocket and put it in the middle. Then, everyone takes $100 out of the middle. By government reasoning, everyone will be $100 richer.

It's all a numbers game, shifting money from one pocket to another.

The other numbers game is one that has been suggested but dropped. Obama has insisted that he will not sign any bill that is not revenue neutral. That means new taxes on someone. The original suggestion was to tax "gold-plated insurance benefits". The implication is that the government will decide how much health care you need. If you get less then you will be fined. If you get more then you will be taxed (a form of fine).

So who gets the gold-plated benefits? You might assume that they go to the rich. While it is likely that top executives get pretty good insurance, someone who is making $20 million a year isn't really worried about whether his co-pay is $10 or $20. It turns out that the group that would be hit hardest by this new tax is union members. The proposal to tax benefits has been quietly dropped with no word on where the new taxes will come from.

Obama - LIberal or Moderate?

This "analysis" from the AP purports to show that President Obama isn't a far-left liberate. He can't be if he has appointed Bush carry-overs. How should we react to this?

The two top posts mentioned are Fed chief Ben Bernanke and Defense Secretary Robert Gates.

The other appointees mentioned are Sheila Bair, chair of the Federal Deposit Insurance Fund; Ray LaHood, Transportation Secretary; John McHugh, Secretary of the Army and Jon Huntsman, ambassador to China. Francis Collins, director of the National Institutes of Health is also listed even thought he is not a Republican. This shows that the list is being padded.

I'm going to ignore the "other appointees" list outright. They make good windows dressing but none of these is in a position to affect policies that are important to the Obama administration.

These choices do shed a lot of light on the Obama administration and its paradoxes. Obama has aggressively pushed for major changes in some areas while keeping Bush policies and, in some cases, Bush hold-overs in others. In many cases, Obama has kept policies that he campaigned against. His Iraq policy is a continuation of Bush's. He campaigned against rendition and tribunals but has allowed both.

I think that there is a very simple explanation. Obama came to office as an ambitious but inexperienced president. He has several areas where he wants to make his mark. There are others that he campaigned on but doesn't really have strong views. That's where the seeming paradox lies. If Obama cares about something then he puts his own man in charge and puts his own stamp on it. If he doesn't really care about it then he appoints a moderate or even a Bush hold-over and lets it continue with little change.

This approach has its uses. The White House can defend itself against charges that it is radical by pointing to the moderates it has appointed. Here's an example:

The notion that he is moving the government to the left "is laughable, it's utterly laughable," said Thomas E. Mann, a government scholar at the Brookings Institution. Mann said the decision to keep Bernanke and Gates "doesn't buy him a thing with Republicans but was a sign of good judgment in both cases" because Bernanke and Gates were doing good jobs.

There are drawbacks. Many of the issues that Obama doesn't care about loom large in the eyes of his supporters. Cindy Sheehan has already pronounced Obama as bad as Bush about ending the wars. Others are upset about the continuation of rendition and the tribunals.

This will eventually come back to haunt Obama. Single-issue voters have long memories and Obama is seen to be forsaking many of them.