Category Archives: Public Policy

So-called Health Care Reform

I try very hard not to be partisan/political in my blogging, but the spectacle that is Washington, DC has completely taken my breath away this evening.  The only thing that was “bi-partisan” about this 219–212 vote in the U.S. House of Representatives was the opposition to the Senate Bill.  Specifically, all 178 House Republicans voted “no”, and 34 House Democrats voted “no”…  Please read the following articles! 

  • A Way Out of Soviet-Style Health-Care, by Milton Friedman

      “Solzhenitsyn’s prophetic warning about the depersonalization of medicine..”

    • Inside the Pelosi Sausage Factory, by Kim Strassel

        “Michigan Rep. Bart Stupak sold his anti-abortion soul for a toothless executive order.”

      • The ObamaCare Crossroads, Wall Street Journal

          “The vote is really about who commands the country’s medical resources.”

        • The Doctors of the House, Wall Street Journal

          “A landmark of liberal governance whose price will be very steep.”

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          Postal Service expected to announce 'significant changes' – washingtonpost.com

          Postal Service expected to announce ‘significant changes’ – washingtonpost.com
          “The U.S. Postal Service will release projections Tuesday that confirm for the first time the suspicion that mail volume will never return to pre-recession levels. In response, the agency is pushing anew for a dramatic reshaping of how Americans get and send their letters and packages.”

          My brother John Garven and I were talking about this very topic yesterday; John mentioned (among other things) that wages and benefits for postal workers account for > 80% of total revenue, which seems rather high, but I am not a labor economist so I don’t know offhand what the total labor costs to revenue ratio typically is for comparable firms.

          I did manage to find a dated (2002) study commissioned by the American Postal Workers Union online which compares labor costs at USPS with labor costs at UPS and Fedex; below, I reproduce my own version of Table 1 on page 2 from that study:

          Capture

          The primary takeaway from this report is that that USPS clearly has (historically had) higher salary and employee benefit costs as a percent of operating revenues, operating expenses, and (adjusted) operating expenses (see the report for the details concerning that particular calculation) than its competitors.

          I have a personal interest in this topic since I have family members who work or have worked for USPS. It amazes me that it has taken the USPS this long to come to the realization that it doesn’t make much sense to staff for a first-class mail world when consumers have so many close substitutes available (e.g., email, fax, alternative delivery via Fedex and UPS, etc.).  This is yet another data point in support of John Steele Gordon’s hypothesis that government can’t run a business.

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          Postal Service expected to announce ‘significant changes’ – washingtonpost.com

          Postal Service expected to announce ‘significant changes’ – washingtonpost.com
          “The U.S. Postal Service will release projections Tuesday that confirm for the first time the suspicion that mail volume will never return to pre-recession levels. In response, the agency is pushing anew for a dramatic reshaping of how Americans get and send their letters and packages.”

          My brother John Garven and I were talking about this very topic yesterday; John mentioned (among other things) that wages and benefits for postal workers account for > 80% of total revenue, which seems rather high, but I am not a labor economist so I don’t know offhand what the total labor costs to revenue ratio typically is for comparable firms.

          I did manage to find a dated (2002) study commissioned by the American Postal Workers Union online which compares labor costs at USPS with labor costs at UPS and Fedex; below, I reproduce my own version of Table 1 on page 2 from that study:

          Capture

          The primary takeaway from this report is that that USPS clearly has (historically had) higher salary and employee benefit costs as a percent of operating revenues, operating expenses, and (adjusted) operating expenses (see the report for the details concerning that particular calculation) than its competitors.

          I have a personal interest in this topic since I have family members who work or have worked for USPS. It amazes me that it has taken the USPS this long to come to the realization that it doesn’t make much sense to staff for a first-class mail world when consumers have so many close substitutes available (e.g., email, fax, alternative delivery via Fedex and UPS, etc.).  This is yet another data point in support of John Steele Gordon’s hypothesis that government can’t run a business.

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          Health Insurance Rate Hikes and Adverse Selection

          I recommend reading the WSJ Health Blog entry entitled “WellPoint’s Argument for 39% Rate Hike: Adverse Selection”, by Jacob Goldstein.  This article explains how adverse selection is causing health insurance claims costs to increase substantially in the individual health insurance market in California. The adverse selection has come primarily in the form of healthy policyholders dropping coverage in the face of job losses due to the recession as the sickest individuals do all that they can do to hold onto their policies. Thus premiums on such policies are increasing (in line with increases in the underlying claims costs) by as much as 39%. This makes total sense because after all, the net effect of this “downard spiral” is that the morbidity risk of the average remaining policyholder in Wellpoint’s California health insurance risk pool has substantially worsened.  In other words, there are real economic factors behind these so-called “skyrocketing” premiums, and it is not due (as some in the Obama administration and news media suggest) to some newfound avarice on the part of various and sundry sleazebag insurance CEO’s who are “putting profits ahead of people”.

          Keep in mind that since insurance is state regulated, HHS Secretary Kathleen Sebelius has no legal authority to undertake a regulatory enforcement action against private insurers.  This is why the White House is urging repeal of the health insurance industry’s exemption from the McCarran Ferguson Act of 1945 as part of its latest health care proposal (specifically, see page 3 of the proposal under the section entitled “Strengthen Oversight of Insurance Premium Increases”). Thus the administration’s current political strategy is to create a regulatory “carve-out” of the health insurance industry so that the feds can regulate health insurance premiums.  Presumably the rest of the insurance industry would, for the time being, continue to be regulated primarily at the state level, as has been the case for the past 65 years.

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          Unintended Consequences

          I am reading a fascinating book at the moment, entitled “Think Twice: Harnessing the Power of Counterintuition” by Michael J. Mauboussin.  The book is about decision-making, and it provides some very useful advice for groups as well as individuals concerning how to avoid making bad decisions that generate (mostly undesirable) unintended consequences.

          The following excerpt from Mauboussin’s book (entitled “Unintended Consequences: Feed an Elk, Starve an Ecosystem”) provides a particularly compelling example.  It brings to mind Hayek’s notion of “spontaneous order”, which refers to “…the spontaneous emergence of order out of seeming chaos; the emergence of various kinds of social order from a combination of self-interested  individuals who are not intentionally trying to create order.” (see http://bit.ly/bbJrVf).   In Hayek’s world, the price system plays a particularly critical role in that it helps coordinate the activities of these self-interested individuals.  Unfortunately, in the public sector such price signals are either muted (often due to various legal/regulatory restrictions) or not present, and when this occurs the risk of (adverse) unintended consequences naturally increases (as in the cases described below).  This helps to explain why, as John Steele Gordon points out, government can’t run a business.

          Unintended Consequences: Feed an Elk, Starve an Ecosystem

          “When you are dealing with a system that has lots of interconnected parts, tweaking one part can have unforeseen consequences for the whole.  Take the example of Yellowstone National Park.  In retrospect, it looks like the park’s woes started when explorers in the mid-1800s couldn’t find enough food in large areas of its 2.2 million acres.  Formally designated in 1872, Yellowstone had seen much of its game – elk, bison, antelope, deer – disappear at the hands of hunters and poachers in the preceding decades.  So in 1886, the United States Cavalry was called in to run the park.  One of its first orders of business was to resuscitate the park’s game population.

          After a few years of special feeding and favorable treatment, the elk population swelled rapidly.  Indeed, the animals became so abundant they started overgrazing, depleting essential flora and causing soil erosion.  From there, events cascaded: The decline in aspen trees, consumed by the hungry elk, shrunk the beaver population.  The dams the beavers built were important to the ecosystem because they slowed the spring runoff from streams, discouraged erosion, and kept the water clean so that trout could spawn.  Without the beavers, the ecosystem deteriorated rapidly.

          Yet the managers of the park were oblivious to the fact that the elk population explosion was responsible for the trouble.  Indeed, after roughly 60 percent of the elk population starved to death or succumbed to disease in the winter of 1919-1920, the National Park Service overlooked the lack of food and falsely blamed the deaths on another group of Yellowstone residents: the predators.

          Taking the situation into their own hands, they killed (often illegally and illicitly) wolves, mountain lions, and coyotes. Yet the more they killed, the worse the situation grew. The population of game animals began to experience erratic booms and busts. This only encouraged the managers to redouble their efforts, triggering a morbid feedback loop. By the mid-1900s, they had all but eliminated the predators. For example, the National Park Service shot the last of the wolves in 1926, only to reintroduce them roughly seventy years later.

          And so it went. The bungling supervision of Yellowstone illustrates a second mistake that surrounds complex systems: how addressing one component of the system can have unintended consequences for the whole. Alston Chase wrote about the National Park Service, “They had been playing God for ninety-five years and everything they did seemed to make the park worse. In their attempts to manage this beautiful wild area, they seemed caught in a terrible ratchet, where each mistake made the park worse off and no mistake could be corrected.”

          That unintended system-level consequences arise from even the best-intentioned individual-level actions has long been recognized.  But the decision-making challenge remains for a couple of reasons. First, our modern world has more interconnected systems than before. So we encounter these systems with greater frequency and, most likely, with greater consequence. Second, we still attempt to cure problems in complex systems with a naive understanding of cause and effect.

          The US. Government’s decision to allow Lehman Brothers, the investment bank, to fail in September 2008 is a good illustration. The government’s position was that since the market largely understood Lehman’s poor financial condition, it could absorb the consequences. But the bankruptcy announcement roiled global financial markets because Lehman’s losses were larger than people thought initially, contributing to an increase in global risk aversion. Even parts of the market that were perceived to be safe, like money market funds, received a jolt. For example, the Reserve Primary Fund, one of the oldest and largest money market mutual funds in the United States, announced it had lost money for its fund holders because the Lehman Brothers debt that it held had been wiped out. The announcement shocked investors and undermined confidence in the broader financial system.”

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          "Paulson's Gift"

          Professors Veronesi and Zingales at the University of Chicago Booth School of Business have coauthored a new research paper entitled “Paulson’s Gift” which empirically calculates the costs and benefits of the US government’s October 2008 bailout of the financial sector of the US economy.  Here’s the abstract from their paper: 

          “We calculate the costs and benefits of the largest ever U.S. Government intervention in the financial sector announced the 2008 Columbus-day weekend. We estimate that this intervention increased the value of banks’ financial claims by $131 billion at a taxpayers’ cost of $25 -$47 billions with a net benefit between $84bn and $107bn. By looking at the limited cross section we infer that this net benefit arises from a reduction in the probability of bankruptcy, which we estimate would destroy 22% of the enterprise value. The big winners of the plan were the three former investment banks and Citigroup, while the loser was JP Morgan.”

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          “Paulson’s Gift”

          Professors Veronesi and Zingales at the University of Chicago Booth School of Business have coauthored a new research paper entitled “Paulson’s Gift” which empirically calculates the costs and benefits of the US government’s October 2008 bailout of the financial sector of the US economy.  Here’s the abstract from their paper: 

          “We calculate the costs and benefits of the largest ever U.S. Government intervention in the financial sector announced the 2008 Columbus-day weekend. We estimate that this intervention increased the value of banks’ financial claims by $131 billion at a taxpayers’ cost of $25 -$47 billions with a net benefit between $84bn and $107bn. By looking at the limited cross section we infer that this net benefit arises from a reduction in the probability of bankruptcy, which we estimate would destroy 22% of the enterprise value. The big winners of the plan were the three former investment banks and Citigroup, while the loser was JP Morgan.”

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