gimme-five | The blog of a busy guy.

CAT | Econ

One of the most important things I have learned is that every choice we make in life has costs and benefits. If I use my only $5 to purchase a latte, I give up the ability to purchase something else with the $5. It’s an elementary principle, but somehow we forget it when we talk about big-picture things.

The Affordable Care Act is an example of this basic lesson. A simplified version of the argument for the ACA is that the President and his supporters wanted to ensure that everyone was covered by health insurance, and that being old or sick would not cause one’s putative insurance rates to be so high that he could not afford to purchase insurance. The ACA also redistributes money to the poor and lower middle class so that they can purchase health insurance for free or at a discounted rate.

By itself, this idea sounds great. No one, except the most partisan, could argue that it would be a good thing if, all else equal, all those who currently don’t have the opportunity to purchase affordable health insurance magically had the opportunity to purchase affordable coverage that they desired.

Unfortunately, it’s not that simple, because things cost money. To pay for the benefit of expanding coverage, which costs money, we have to find a source of revenue. The ACA’s proponents have claimed that this revenue will come from people buying into the health insurance system who otherwise would not have done so, and the money from those individuals being redistributed to benefit the poor, old, and sick. The ideal situation, according to the ACA’s proponents, is that lots of young, healthy individuals will buy in to the system. The unspoken logic is that such individuals will effectively pay the way for others have affordable healthcare coverage. The ACA’s proponents also believe that the new law will result in some limited efficiency gains, such as lowering dependence on emergency room visits by substituting preventative care, though no one seriously contends that these efficiency gains pay for the bulk of the cost (and it’s up for debate whether the law actually makes insurance less efficient). That’s why the ACA includes the individual mandate, which requires individuals to purchase insurance or pay a penalty. And that’s also why the ACA makes illegal insurance policies that provide “sufficient” coverage. The point is to require the young and healthy to buy in, and to pay not only for insurance coverage they think they’ll use, but intentionally to get them to pay for insurance coverage they almost certainly won’t use, so that this coverage will be cheaper for the law’s beneficiaries.

To put it another way, because the bulk of the cost must be paid for the young and healthy, they, as a group, are the “losers” of the ACA, whereas the old, poor, and sick are the “winners.” The cost that can’t be paid for by the young and healthy will be paid for through increased premiums, so to the extent one’s insurance premiums go up, one is also a “loser” whose costs are distributed to the law’s “winners.” (Additionally, to the extent the law leads to increased taxes, those paying the taxes are also “losers.”)

Moreover, for the reasons discussed above, no one can seriously contend that the ACA is “free.” That is, if we’re going to expand health insurance coverage, it’s going to cost a positive dollar amount. Given the number of uninsured and seniors (e.g. baby boomers) in this country, this will be a substantial dollar amount.

Therefore, in arguing over whether the ACA is good policy, the question is not simply whether you believe that it is good that everyone has health insurance, or whether you believe that we should spend less. This is not the question because for every story about a family who is able to buy health insurance at a lower rate, there is a story about a family that must cut back because they have to pay a higher rate. The question instead is whether the expansion is worth the cost and redistribution of wealth. For a number of reasons, I have my doubts that it is. For example:

  • Why are we redistributing even more wealth from the young to the old? The old in the US consume so many resources, have the benefit of social security (which may not be around for the young), and have passed the buck of the nation’s crippling debt onto the young. Moreover, a huge percentage of the old in the country have not saved for retirement and will likely need to be “bailed out” using the resources of the young.
  • Why won’t the ACA’s proponents frame the issue of the ACA as the trade off that I have labeled it here? They speak as if the law will cause no one to pay a single penny more. But as we’ve learned from the President’s embarrassing about-face instructing insurers that he won’t enforce the part of the ACA that required them to cancel plans that were not deemed sufficient by the law (which is plainly unconstitutional and practically a disaster), the law clearly is a trade off.
  • So far, we’ve heard far more about “losers” than “winners” in the news; that is, we haven’t heard many stories about people or families saving money, but we’ve heard lots about insurance rates going through the roof. Particularly embarrassing for the President was using an anecdote of a woman who thought she had saved money under the ACA, but then learned the rate that she was originally offered was a computer error and her true price was far higher.
  • Many of the uninsured who have pre-existing conditions today were once young and healthy, and chose not to purchase insurance when they were younger. They took the benefit of not buying insurance (saving money) when they were young, and bore the risk that they might be unable to purchase affordable coverage if they developed a health condition while uninsured. Under the ACA, however, they are bailed out of the consequences of their risk, on the backs of the present young and healthy who no longer get to make the same choice. This is simply a wealth transfer from young to old.

This doesn’t mean that the concept of expanding health insurance coverage is a bad thing. Perhaps to you, you believe that the concept of universal health insurance is so valuable that it is priceless, which justifies your belief that the benefit is worth the cost. (Though I would disagree that anything is “priceless,” and would ask why the burden should be on the young and healthy to fund your belief.)

What is to be done about this? I don’t agree with the tactics of the Tea Party to threaten the apocalypse if the ACA is not repealed. But I do think that the President needs to be more flexible in discussing substantial modifications to the ACA. The law is not a panacea, and should never have been marketed that way. I would be interested in seeing amendments that, for example, place heavier burdens on well-to-do seniors, or focus more heavily on actual efficiency improvements as opposed to wealth redistribution.

 

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The WSJ is reporting that ethanol subsidies may end by August.  If so, that is fantastic news.

Sen. Dianne Feinstein (D, Calif.) said in a statement that she had reached an agreement with Sens. Amy Klobuchar (D, Minn.) and John Thune (R, S.D.) under which a 45-cent-a-gallon tax credit for blending ethanol into gasoline would expire on July 31. A 54-cent-a-gallon tax on imported ethanol would also expire at the end of the month.

Some $1.33 billion in savings would be used to reduce the $14.29 trillion U.S. debt. A third of the savings—an estimated $668 million—would be used to extend tax credits, such as those for alternative-fueling infrastructure like ethanol pipelines that some producers hope to build.

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Shortly after my last post, the Senate re-voted on whether to eliminate ethanol subsidies, and this time, the measure passed, 73-27.  Apparently many Democrats who voted against the earlier measure on alleged procedural grounds voted for it in this instance.  Though perhaps they voted for it because it was attached to the Economic Development and Revitalization Act, which the Washington Post posits is unlikely to obtain final senate approval.

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On June 14, 2011, the Senate voted on a bill to repeal $6 billion in annual ethanol tax subsidies.  These ethanol subsidies are wasteful and unhelpful to Americans, as I have discussed in prior posts.  For example, ethanol production requires a large amount of land area, some evidence suggests that ethanol costs more energy to create than it yields, using corn for fuel increases the price of food, ethanol adversely impacts fuel economy and damages older vehicles, and even damages newer vehicles when in high enough concentration (see the prior three links for more information).

Despite the fact that politicians almost uniformly agree that the nation has a debt problem, and thus needs to either decrease spending, increase taxes, or both, the measure failed, because there were not enough votes to overcome a filibuster.

There are two sources of blame for this.  First are the Democrats, who overwhelmingly voted against the bill.  Supposedly one of the major reasons was because Harry Reid whipped against the bill due to alleged procedural problems.  Though I think the more likely answer is so that Democrats can attempt to grandstand about creating or preserving jobs, no matter how worthless the jobs are.  (For example, President Obama recently remarked on the Today Show, that “there were ‘structural issues with the economy. . . . You see it when you go to a bank you use the ATM, you don’t go to a bank teller.’”)  It’s true that subsidizing ethanol will preserve jobs in the ethanol industry.  Though of course if those jobs are worthless, then the government might as well be paying people to dig holes and then fill them up again.  It is inexcusable that Democrats would overwhelmingly continue to support ethanol subsidies when the evidence simply shows that they do more harm than good.

But the more surprising source of blame are a select group of Republicans, led by Grover Norquist (not a senator), the founder of the Americans for Tax Reform.  The ATR members have signed a pledge that they refuse to raise taxes for any reason except for economic growth.  Norquist ordered the members of the ATR to withhold support for the anti-ethanol bill because eliminating the ethanol subsidy, to Norquist, would be tantamount to raising taxes.

I disagree with the rationale for Norquist’s order on two grounds.  First, tax subsidies are spending just as much as they are tax increases.  If the government agrees to give me $10 at tax time (spending) or agrees to give me a $10 decrease in tax liability at tax time (subsidy), the net effect is the same: the government transfers $10 of wealth to me.  Likewise, the tax subsidies that the ethanol industry receives are a transfer of wealth from the government to private businesses.  Whether they are characterized as a tax increase or spending cut is immaterial.  The key question we should be asking is whether the costs of this tax subsidy exceed the benefits.

That leads me to the next objection I have to Norquist’s order, specifically, that Norquist unequivocally refuses to consider the merits of legislation that “raises taxes,” simply because he believes that it “raises taxes.”  Norquist refuses to consider the costs and benefits of what he thinks are a tax increase, even if they benefits would vastly exceed the costs.  This of course will impede bargaining with any politician who believes that solving the federal debt problem requires a combination of spending reduction and tax increases.  And this problem is exacerbated by the fact that Norquist’s definition of “raise taxes,” is much far too broad.

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Payday lenders have often been accused of taking advantage of consumers by charging exorbitant interest rates to low-income consumers who borrow from them.  Some proposed legislation, including a referendum on the ballot in Montana, seeks to cap the annual interest rate payday lenders and certain other lenders may charge to 36%.

The argument for the legislation is that low-income consumers are taken advantage of by payday lenders, who charge interest rates as high as 400% per year.  This argument is somewhat persuasive in that low-income consumers going to payday lenders often lack financial savvy and fail to understand the ramifications of taking on a high-interest loan and then failing to pay it back promptly.

The contrary argument, which I find more persuasive, is that a cap on payday loan rates will drive payday lenders out of business, and thus eliminate the payday loan option for consumers who truly need payday loans.  John Koppisch at Forbes.com writes:

Payday and other non-bank consumer lenders take tremendous risks handing over money to customers they often don’t know and who have a very high default rate. These lenders don’t have the FDIC or TARP safety net enjoyed by banks. They need to look the borrower in the eye, size up their employment record, financial situation and sincerity, and then make an educated guess on whether they’ll see their $75 or $2,000 ever again.

In other words, payday lenders take massive risks on making loans to customers who walk into their office on short notice and with financial emergencies necessitating a payday loan.  Risk is costly, which is why loans always cost more money when they are for riskier borrowers.  Payday lenders don’t charge low interest rates because many of their borrowers default – far more than those who borrow through more traditional loans.  To make up for the loss, payday lenders must charge higher interest rates.  A payday lender may make a large profit on one payday loan, but much of that profit is likely to be used to offset the losses from defaulted loans.

If the amount of interest a payday lender can charge is capped, then to make the same amount of profits, a payday lender will have to hope that far fewer people default on their loans.  That won’t happen.   Instead, payday lenders’ profits will shrink, likely so far that they’ll be pushed out of business.  Koppisch again:

Laws like this usually end up putting dozens of mom-and-pop outfits out of business and sending hundreds of employees to the unemployment line. Expecting the measure to pass, nationwide chains such as Advance America have already closed outlets in [Montana]. The interest rates allowed are just too low to cover the losses from deadbeats. In 2008, a 24% interest-rate cap took effect in Washington, D.C. and soon every licensed payday lender had disappeared from the market and such loans were no longer legally available anywhere in the city. A 36% cap began July 1 in Arizona, forcing many payday loan companies to shut down.

The idea of capping payday lending rates is heavy-handed, misguided legislation.  A better proposal would be to require payday lenders to provide clear information on the costs of each payday loan to each consumer.  If consumers are fully aware of the costs of a payday loan, there is no good argument why they should not be allowed to obtain one.  Clear language in payday loan contracts, brochures, and interactions with consumers would be far more helpful than a cap on interest.

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