Tuesday, March 19, 2013

Allison on govt policy and the financial crisis

John Allison's book is a helpful look at the government policies that contributed to the housing bubble, the financial crisis, and the "Great Recession". As with the Great Depression, any blame ascribed to markets should be balanced (if not overwhelmed) by the clear damage done to the economy by a series of bad government policies. In this case, contra Ezra Klein, Allison places primary blame on govt policy that encouraged a bubble in residential real estate; mistakes by financial institutions; and lots of bailouts and crony capitalism. (On the latter, he targets AIG and Goldman-Sachs [p. 128-129].)

Allison doesn't discuss the Great Depression at any length. Back then, we had a massive import tax increase (Smoot-Hawley), four tax increases (including a new tax on labor to finance Social Security!), declining money supply (thanks Fed!), price and wage floors (including a new minimum wage, making workers less attractive to firms). The result: unemployment peaking at 25%; GDP shrinking by 1/4 in four years; 10 years of double-digit unemployment; and 19% unemployment in the 6th year of the so-called "New Deal". Very impressive work, gentlemen! It makes President Obama and the current Congress look like a bunch of geniuses.

Allison starts with the assertion that "financial services" is probably the most regulated industry in the world (5). I don't know how one would measure that, but the broader point clearly holds-- that it is a highly-regulated industry. As such, problems in the industry might be blamed in some part on markets, but government has to take (big) responsibility insofar as it exercises (tremendous) power.

Allison also notes that housing is more consumption than investment. Land is more of an investment, but a home will necessarily depreciate and requires maintenance costs. People have gone along with the investment rhetoric-- and the reality that buying is more of an investment than renting. Still, they are confused about the role of inflation in real gains; they see higher prices and imagine that the real value is increasing substantially. Ironically, Allison notes that the change in perspective-- stemming from the Crash-- has further undermined value in that market (73-74).

Mal-investment, as encouraged by the govt, is harmful to society and consumers. On the latter, savings is reduced and it encourages marginal people to move into something they can't afford. Ouch! As always, you gotta love those good intentions! That is enough, right?

Allison includes some delightful quotes on the FDIC from FDR-- that it would "place a premium on unsound banking" and "involve the govt in probable loss" (37). He said similarly negative things about the disincentives inherent in welfare policies, but his concerns did not carry the day in his decisions. The FDIC is designed to be revenue-neutral overall, but breaking that down: this means that the bad will be subsidized by the good. It also establishes an implicit cartel-- and creates a moral hazard problem for investors and banks. As a prominent example during the crisis, Allison critiques the bailout of Washington Mutual (75-76) in its payment of uninsured depositors in full. "Until the WaMu failure, the idea had been that uninsured depositors would impose discipline on a reckless bank...The FDIC had taken part of the money that should have been available to pay bondholders and given it to uninsured depositors...complete contradiction to past practice...no rule of law...forced the failure of Wachovia..." Allison also describes a private solution, along the lines of what we have in life insurance and in securities (48-49).

Allison is unimpressed with regulators: "in almost every case...govt regulators have been the last people to know...extraordinarily naive...lack of understanding of human nature and the power of incentives...[and] of the information available to [them]...dominated by lifetime bureaucrats [who] follow the rules and not rock the boat...very process-oriented...the best and brightest individuals tend to leave." (41, 46) For effective govt policy, one must have good info and good motives. Without both, you get a mess. Allison devotes all of chapter 14 to the failure of the SEC.
Allison pursues an aside on discrimination in lending (42-43): "leave themselves tremendous leeway to interpret their own regulations...extremely political...no objective rule of law..." He describes the usual, profit-mongering incentives for banks to loan green to good risks, whatever the color of the applicant. (Are they greedy or not? I get mixed up on this.) And he points to the poor/univariate empirical work that seemed to show discrimination, before citing the careful work that controls for more variables and causes the apparent discrimination to disappear. But after the focus on discrimination and the bureaucratic and legal heat (he shares BB&T's story on 44-45), risky lending to minorities increased-- good news for them short-term, but not for many of them in the long-term. Ahhh, but we had good intentions.

The carrot of general subsidies for risky lending and the stick of penalizing those who didn't seem to loan to enough minorities created unfortunate incentives and results: "encouraging people to buy homes that were too big, to speculate on housing based on govt incentives, or to buy houses that they could not afford..." There were other ethical problems too: subsidizing the wealthy; subsidizing a particular lifestyle choice (owning), supporting consumption over investment, and subsidizing residential real estate over other sorts of investment (54-55).

Allison argues that Fannie Mae & Freddie Mac (F&F) should not exist, let alone dominate the housing market. He notes the destruction of the S&L's industry through govt policy (96-97) and notes the emergence of F&F as dominant players in the wake of that disaster (97). Allison is particularly upset that F&F did not report their $2 trillion in subprime loans. They "funded a major percentage of the misinvestment...and provided materially misleading information that contributed to errors by other market participants." (61, 64-65). F&F, given the moral hazard of a guaranteed bailout engaged in risky loans, encouraging if not requiring the same from competitors: "a competitive race to the bottom" (100). 

One bit of institutional knowledge I learned: the bond-ratings agencies are a govt-sanctioned oligopoly-- explicitly for ERISA, but then implicitly through the federal imprimatur (81-82). They did a terrible job and there was no competition to correct this or hold them accountable-- an utter failure and fraud (82). Within the oligopoly, the incentives were twisted: agencies used to be paid by buyers, but then were paid by sellers-- a BIG difference! (83-84)

Allison also describes a lending practice I had not heard described: "pick-a-payment" (89-91)-- where buyers paid LESS than the interest payment. This works well if the value of the home increases enough-- as increasing home equity offsets the loss in equity from insufficient payments. What a joke!

He covers the myths surrounding the exaggerated role of derivatives (122-123). They were too small to be a major player. Some/many were used to reduce risk rather than engage in speculation. And they are zero-sum. Likewise, he demolishes the amazing myth about banking deregulation during the Bush Years in chapter 13. Instead, there were three major financial regulatory efforts: Privacy Act, Patriot Act, and Sarbanes-Oxley. See: Daniel Mitchell vs. Paul Krugman.

He has a good description of the pros and cons of "fair-value accounting" in chapter 11.Allison wrestles with the likelihood and type of market correction we would have had without so much intervention (ch. 15)-- especially TARP (ch. 16). And he closes with explicit policy RX's (chs. 17-20, 23); a discussion of the relevant, underlying philosophy (chs. 21-22) and ch. 24's call to principled action in all realms.

I don't know enough about the relevant industries and regulators to say whether Allison provides the definitive account. But it makes sense in light of economic incentives and it lines up with the usual problems one finds with government-- regulation, cronyism, good intentions, and so on.

Friday, March 15, 2013

Goodman's "Priceless"

John Goodman is known as the father of Medical/Health Savings Accounts (MSA's/HSA's). He co-authored a huge book with Gerald Musgrave in the mid-1990s (in response to the Clinton health care plan) called Patient Power (large or small version), which ably described the same sort of problems we have in health care (HC) and health insurance (HI) today. They proposed HSA's as part of a politically-attractive solution to the problems we faced and still face. Good/bad news: HSA's have been embraced in DC, but slowly and only partially. Even so, they have been somewhat helpful-- most notably, by helping to change the culture of consumer and producer behaviors in the market for HC and HI.

Goodman is also the editor of the NCPA's Health Blog-- a daily-updated must-read for those interested in public policy, particularly health care. 

Now, Goodman has written Priceless: Curing the Healthcare Crisis. I'd say his primary thesis is that the supply side of HC must be unleashed to make progress in this arena. It doesn't take a PhD to understand this: if one tries to increase "access" and enhance demand-- without increasing supply or even, working to reduce it-- the results will not be an increase in HC, but rather an increase in the money costs of HI and an increase in at least the non-money costs of HC.

As Goodman notes, "In other sectors, needs to be met and problems to be solved are the fertile ground from which entrepreneurs emerge...There are literally thousands of entrepreneurs in HC...[But] they run into three major barriers: insurance companies, employers, and government." (6) Beyond that, government activism tries to replace supply-side market activity with demand-side regulations and bureaucracy: "Successful innovations are produced by entrepreneurs, challenging conventional thinking-- not by bureaucrats trying to implement conventional thinking." (74) Goodman seriously considered "Doctor Power" for the title of this book-- and fittingly, along the way, Goodman tells the stories of some of these entrepreneurs (e.g., 6-9). 

Putting it another way: "Under the conventional approach, [providers] ask 'How can I squeeze more money out of the payment formulas today?' My answer is just the opposite. Under the approach I recommend, all these people will [ask] 'How can I make my service better, less costly, and more accessible to patients" (5)

Another key theme is the distinction between price and non-price "rationing" costs of HC. "The orthodox approach to health policy is obsessively focused on the burdens of price barriers to care, and at the same time, inordinately oblivious to the burdens of non-price barriers." (22) From another angle, Goodman notes that improved "access" to HC through HI is not necessarily equivalent to receiving more HC (especially in light of the point above). 

If non-price rationing costs increase, the first thought would be that this should be advantageous-- at least relatively speaking-- for the relatively poor, given their lower opportunity cost of time. But there are two problems with this. First, improved HC access is not meant for the poor (who already have access through Medicaid), but for those the lower-middle and middle classes-- whose op costs of time can actually be higher (given the prevalence of single-parent and dual-income households). Second, Goodman notes that those with more resources are usually able to navigate complex/jacked-up systems more effectively. He relays data from the recession as a natural experiment which underline these concerns (107-108).

Goodman spends a lot of time on medical tourism-- both within and between countries-- given what it says about allowing markets/entrepreneurs to carry a lot more weight and to indicate whether the market is "going". For example, he asks some questions related to tourism (15): Why does a Canadian get an American knee replacement for half of the price paid by Americans? Why do fees paid by insurance vary by three-fold for knee replacements for Americans? Why is the price of a knee replacement for dogs-- requiring the same skills/technology-- one-sixth of the cost? (He expands on this by discussing non-surgical hospital amenities for humans v. dogs-- p. 15-17.) Goodman also talks about MediBid which allows domestic tourism for relatively inexpensive medical procedures, for those willing to pay out-of-pocket (17-19)-- and covers another set of examples later (104-105).

Goodman also deals with two comparisons that get a lot of press.

First, on Canada, Goodman notes that it is has one of three single-payer HC systems in the world, along with N. Korea and Cuba (48). What Canadians "have is not insurance in any real sense of the word. What they have is an imperfect system of free care." (121) He also notes that uninsured Americans get as much or more preventative care as insured Canadians; low-income whites in America are in better health than those in Canada; minorities are "treated better" in America than in Canada; and people in our ER's get treated more quickly with better results (48). What's the big deal? Proponents "do not like it because of any particular result it achieves. They like it because they like the process." (48) Sounds like statists and people who lack policy imagination. (See also: K-12 education.)

Goodman asserts that the differences between Canada and the U.S. are less than both proponents and opponents perceive-- he estimates it at 20%, since third-party payers pay the vast majority; pay by task; it's free vs. nearly free to consumers. People typically focus on the 20% and ignore the 80%. "In both countries, normal market forces have been completely suppressed. HC in both places, therefore, is bureaucratic, cumbersome, wasteful, inefficient and unresponsive to consumer needs" (91). People believe there are larger differences because the private sector is more involved with the money in the U.S., but given the market power, third-party involvement, and government overlord, it's a distinction without much of a difference. "Differences in health outcomes are far more related to lifestyle, culture, and personal behavior." (93)

Second, on the frequent claim that Medicare has lower admin costs than private insurers-- 2% vs. 10-15% (p. 82):

--Much of Medicare is administered by the private sector; and all private sector activity is heavily regulated and subsidized by the govt. So, the distinction is not nearly as impressive as it sounds.

--When such distinctions are made: Private includes the cost of marketing and selling; public does not include the cost of tax collection.

--From studies and Medicare's own accounting-- with all costs included, Medicare costs more. They are only lower when expressed as a percentage, but since Medicare deals with the elderly, a far larger denominator makes the Medicare number look more impressive than it would in an appropriate comparison.

--Ironically, Medicare may spend too little on admin, given the pervasiveness of (difficult to measure) fraud.

Some miscellaneous points: 

1.) Goodman provides some interesting numbers from 2008, in support of the "dynamics" of health care spending-- that it tends to be relatively few people doing the vast bulk of the spending over relatively short periods of time (33-34): 1% account for 20% of spending, but the next year, 80% of those drop out of this category. 5% account for nearly 50%; 62% dropped out of this category the next year. 10% account for 64%; more than half dropped.

2.) On the controversial contraception mandate issue, Goodman notes that the government could provide services for the few who cannot afford them-- adding to what it spends already; making them available OTC; or allow pharmacists to prescribe them (41). The desire to mandate it stems from bullying/statism or a lack of policy imagination-- neither of which is admirable.

3.) Goodman notes the double standards applied to public/private insurance (41-42): If a private insurance company denies treatment, it's a moral outrage; if done by public insurance, it's an unfortunate budget issue. (Watch for more of this, going forward.)

4.)  I've often used the famous analogy between HI and other forms of (true) insurance. HI is more akin to prepaid HC-- and thus, "not fundamentally about a relationship between the insurer and the insured. It's about a relationship between the insurer and the HC providers." (125). Then, he draws out other analogies: "Home insurers are not in the roofing business. Auto insurers are not in the car repair business...[Imagine] choosing an auto insurer so you can have your car repaired at a particular auto repair shop." (125, 128)

Monday, March 4, 2013

Relman on health care

Arnold Relman is a (medical) doctor and the former editor of the NEJM. One of my colleagues recommended his book, A Second Opinion. I like to read widely on complex topics. Although Relman is not an economist or policy analyst (by training), he's worth a read, given his time in the medical field and his prominence in the popular debate on the topic of Health Care (HC) and Health Insurance (HI). (See: his  recent NYT Review of Books piece; I'll add comments on this below.)

I certainly don't mind someone NOT being an economist-- as long as they don't say silly stuff about economics and economists. To note: Relman says "Economists in particular argue that most of the HC system's problems can be solved simply by allowing the market to work, with only minimal help from government. My experience has convinced me otherwise." (p. xvii) On what planet did he get this experience? Or this: "There can be little doubt that today's HC system has become thoroughly saturated with market ideology." (31) Hmm, would he say the same about statist ideology, given the extent of government spending, subsidy, and regulation in the same system? I doubt it. (He doesn't do it here!) He's similarly tin-eared about "markets" and standard economic analysis. For example, he doesn't want to put a "value on life" (46). But he probably does that in his personal life by only purchasing a limited life insurance policy. Or this conclusion: "If the market is not going to save our HC system, must we conclude..." (111) Well that certainly answers the subsequent question!

Thankfully, Relman acknowledges, at one point, that health outcomes are far more than a function of HC and HC spending (47). Well, at another point, he makes the opposite claim (53). Usually, proponents of even more govt intervention in HC talk as if spending and HC are all that matters to health outcomes, as they cavalierly trot out the stats comparing our outcomes to those in other countries. So, it was refreshing to see him break out of that canard, if only for a moment.

Unfortunately, Relman repeats the common conflation of all health care matters into the few instances where people have little or no choice (47). In this "analysis", everything is akin to a heart attack-- some sort of emergency where one doesn't have time to "choose" the services one receives. Instead, the vast bulk of health care services are delivered with far more patient discretion-- from allergy shots to cancer treatments.

Throughout the book, Relman acknowledges that the prevalence of third-party payment is a key part of the problem. But he doesn't seem to understand or explain how that's happened. (I and many others have written about the cause of this-- government subsidies for HI through the workplace. In fact, we cover this in both E101 and E150.)

Relman cites Kenneth Arrow's seminal piece on information problems/limits in HC and HI. But oddly, his lit review ends 50 years ago (22-23, 96). John Goodman crushes this (surprisingly common) approach-- both because it's a really lame literature review and, well, even if it holds, it's wrong in its application.

He has an aversion to profits in HC/HI. I can't really speak to the subjective part of his preferences there-- any more than I can debate why you should like pepperoni more than sausage on pizza. But it's noteworthy, since it colors his analysis and takes him a long way toward his conclusions. One can also point to the inconsistencies in this view: Are HC and HI different for him, compared to other markets-- and if so, why so? Why does he expect government agents to be less "greedy" and self-seeking? Why does he imagine that government policy, in practice and in combination with powerful interest groups, will yield better outcomes?

For example, he recognizes incentives to profit-max in a market setting (49, 50, 113), but doesn't seem to recognize the unfortunate incentives that accompany government operations and political economy. (He upholds various govt agencies as impressive [126]-- which to the knowledgeable observer, undercuts his case!) He sees overhead in private efforts (50-51, 113); he doesn't see bureaucratic costs in public efforts. (One can be discouraged by the former, but don't ignore the latter!) He does note that service providers are incentivized to provide more services (86-87), but doesn't seem to see the usefulness of tort reform and having people pay for services more often (motivating them to care a lot more about the services requested by providers; 99).

He spends a chapter on "consumer-driven HC" but is mostly unimpressed (94). Unfortunately, he doesn't understand the impact of HSA's by income class (100-101); he doesn't understand that HI often covers preventative care (101), even in our distorted HC/HI markets; and he greatly exaggerates the size/impact of HSA's at present (110).

A lot of this relates to the old, defunct line of reasoning made famous by Kenneth Galbraith-- that monopolies would likely be more efficient because they wouldn't have to waste money on advertising and the like (134). All things equal, that's a brilliant point. Unfortunately for Galbraith and Relman, not nearly all other things are equal.

In his article, Relman makes a series of correct and surprising claims that will disappoint most fans of ObamaCare. (In this, he elaborates on ch. 3 in his book-- and interestingly, echoes Goodman's pessimism about the efficacy of the current reforms. Likewise, fans of Canada will be disappointed by his panning of their system [155], which again parallels Goodman.)

"Both parties claim to have the answer but, as I will make clear, no initiatives proposed by either party have much chance of significantly slowing the rise in federal health costs without reducing access to needed services. Major reform will be required, but that is not even under consideration."

Expanding on this: "The Act expands insurance coverage but, as already explained in these pages, it is not likely to slow the rise of costs significantly [nor is it likely to expand HC]...First, the Act does not replace—but expands—the investor-owned private health insurance industry...Second, the Act does not change the method of payment for most medical care...Third, it does nothing to change the current fragmentation of medical care." This third factor is probably not nearly as big of a deal. But who knows what a much-less-encumbered market would give us?

Despite this solid level of analysis, the "subsequent" proposals are based on non-sequiturs for analysis and/or speculation about likely results. Interestingly, he does embrace state-based reform (a good sign), but then sees that as a bridge to assumed-to-be-competent national policy (oops!). 

I appreciate my colleague's recommendation and enjoyed reading another work in the field. I can only hope that he'll read at least one book from the pro-market side-- e.g., Goodman's Priceless. As for Relman, I'm left hoping that he was a far better doctor and editor than public policy analyst. Likewise, I can only hope that he would apply the famous dictum "first, do no harm" to his overly-avid embrace of government as a prescription. Unfortunately, the patient is already over-medicated and little has been done to recognize the damage done by the "solutions". Just give the patient more meds; I'm sure that'll fix things.