Why Buying Health Insurance is Not Like Buying Goods

Noah Feldman does a nice job of explaining this distinction, which seems to have been a stumbling block thus far for a few of the right-leaning justices:

The answer is that health care insurance is different because if the healthy people fail to get themselves coverage, it becomes extremely difficult — under some conditions, impossible — for the insurance market to operate. That is, as the healthiest people leave the pool, the market for health insurance starts to unravel, as people who would buy it at a price where the insurance companies would be willing to provide it will be unable to do so.

In other words, when it comes to the strange and unusual case of health insurance, inaction causes the whole market to break down. By not buying health insurance, the healthiest person is depriving everyone of a public good. By sitting on their hands — and acting rationally — people who do not purchase insurance are unintentionally causing the market to fail.

Scalia had a peculiar way of misstating this issue yesterday: “If people don’t buy cars, the price that those who do buy cars pay will have to be higher. So you could say in order to bring the price down, you are hurting these other people by not buying a car.”

This is exactly false. If demand for cars were to drop, those who were still buying cars would begin to see lower prices. In the car market, as in most other markets for physical goods, demand correlates directly with price, such that a drop in demand would generally force the manufacturer to bring down its prices.

But cars (or broccoli, or apples, or whatever) are not at all like insurance, where you typically see an inverse correlation between demand and price. The fewer people who enter into an insurance market, the more money they will most likely have to pay for their coverage. That is because insurance prices, unlike the prices for most goods, are based on assessments of aggregate risk in a subscriber pool, rather than on pure measurements of supply and demand. If you are an insurer, and your pool consists of one or two at-risk subscribers, then you have no choice but to charge them a high rate. However, if your pool consists of ten subscribers with varying levels of risk, then everyone gets to pay a little less.

This is the economic rationale for bringing more uninsured Americans into the insurance pool, and it is thought to be especially efficacious in this case because so many of the currently uninsured are young, healthy people who would be considered low-risk.

Yet, logical as that may sound from an economic standpoint, it is not even the legal rationale for enabling the government to enforce an individual mandate. The rationale there, as Feldman explains, relates to the basic relationship between demand and price in the insurance market. If demand for health insurance were to continue to drop (because of a poor economy, for instance), then prices would inevitably rise, and then even fewer people would be able to afford coverage. This process would snowball to the point that only the rich could afford insurance at high rates. As such, if the government did not regulate inaction in this market, the market would eventually become dysfunctional and many people would become unable to take action to obtain a necessary service. Thus, the government’s authority to regulate commerce in promotion of the public good should seemingly kick in.

The key point is that when you buy insurance, you are not engaging in a typical sort of transaction. It would be closer to the truth to say that when you break your leg and stay in the hospital for a week, your insurance company is transacting with the hospital for the cost of your care. In any case, to treat health insurance like broccoli is really missing the point, both economically and legally.

Health Care’s Moment in the Sun

The Supreme Court began the second day of its hearings this morning over the health care law, and news reports indicate that the four justices on the fence — Kennedy, Scalia, Roberts and Alito — opened the session with some tough questions for the Obama administration’s legal team. The key issue under debate today is whether the federal government can require citizens to purchase health insurance from private vendors or else pay a penalty.

This issue is significant not just within the scope of this case, but as an emblem of the current political divide in the nation. On one side, conservatives who oppose the law argue that it violates individual rights and liberty by forcing people into the marketplace. On the other side, liberals who support the law maintain that it performs the necessary task of wrestling down ever-rising health care costs.

However the Court rules, the case will quickly go down in the books as a defining statement on the modern meaning of the Commerce Clause, as well as on the power of the federal government to regulate the economic activity of citizens. The case is also a testament to the functionality of our government, something that has been subjected to grave doubts over the past few years. Despite an effective labeling campaign by opponents of the health care law, so-called “Obamacare” was passed in both the House and Senate after months of vigorous debate, signed into law by the president, and then challenged in the judicial system. Now it reaches its final showdown at the nation’s highest court. Whatever the outcome, to trace the path of this piece of legislation over the past two years is to witness a clinic in technically sound American democracy. The rest, as they say, is just politics.

Solicitor General Donald B. Verrilli, Jr., who is arguing the case for the Obama administration, will rely on a variety of precedent (Wickard v. Fillburn, Gonzalez v. Raich, et. al.) as well as the Supreme Court’s recent tradition of generously interpreting the Commerce Clause. The appellants’ contention is that the government may not require economic activity by citizens under pain of financial penalty. Mr. Verrilli will urge the Court to focus on a different question, namely whether Congress may regulate the manner in which citizens acquire a service they will inevitably need.

Some commentators have likened the issue to other situations involving the acquisition of insurance. Automotive operators, for example, are in violation of law if they operate their vehicle without valid insurance. There is no legal requirement, however, to own or operate a vehicle. The difference between health and other forms of insurance, Mr. Verrilli will argue, is that every person will certainly need health care at some point in their life. If that argument holds water, then the case becomes less about the government coercing citizens to engage in voluntary economic activity, and more about concocting a solvent scheme for financing a needed service. This latter construction, most experts say, should be viewed by the Court as a proper exercise of the government’s authority to regulate interstate commerce.

Regardless of the fate of the health care law, there will be further obstacles down the road to providing solvent and sustainable health care to all Americans. The expenses of Medicare continue to bloat at an alarming rate, while proposals to raise the retirement age for the first time since the passage of Medicare in 1965 have run up against staunch and wide-ranging opposition. Bringing a greater number of younger, healthier people into the insurance pool — one of the effects of the individual mandate — will bend the cost curve down, but the basic structure of Medicare will still require further consideration. In the 1960s, when Lyndon Johnson signed Medicare into law, the life span of the average American male was about 65. Today it is almost 80. The original logic for Medicare was that the government would ease the burden on people who could physically no longer be part of the workforce. Today, with most people retiring in their 60s and living another 15-20 years on average, Medicare has morphed from a safety net into a broad pension program of sorts. This change has had a disastrous effect on the national budget, and will continue to wreak havoc unless some tough compromises are made.

One of the strange outcomes of the legislative debate that produced the law currently under consideration, is that had the Obama Administration’s original campaign for single-payer health care been successful, there would be no individual mandate to review. Under that proposed scheme, all Americans would have received free, government-administered health care financed by an increase in income taxes. However, because of conservative opposition to universal health care, that proposal never made it out of the gate. The ensuing compromise produced a law that mandates individuals to purchase insurance from private providers. That mechanism, which was not a part of the original policy conceived by the president and many liberal supporters in Congress, is now the most contentious element of the law.

The interplay between politics and law is a perennial — and often festive — element of American governance. Legislative debate, combined with a restless media, has been known to produce strange and unpredictable outcomes, especially in recent times. Yet, the nature of our political system is that those outcomes reflect, in some unsettled sense, the will of the people. Thus, in cases such as this, one cannot help feeling a modicum of empathy for the concept once termed by the great Yale Law Professor, Alexander Bickel, the “counter-majoritarian difficulty.” Which is to say, the people have made a law for themselves, so what place do nine judges have in saying anything further about it?

Freud, the Social Innovator

Benjamin Fong, a doctoral student at Columbia, discusses Freud’s legacy in the Times‘ “The Stone.” For those less enthralled by hardcore psychology than by the social and economic implications of Freud’s work, Fong’s last two paragraphs are the most inviting:

Against our culture of productivity and its attendant subculture of “letting off steam,” Freud hypothesized that the best way to refashion our world for the better is to adopt a new way of speaking to one another. Above all, this radical way of talking is defined by what appears to be extended pointlessness, something we are increasingly incapable of tolerating as the world around us moves ever faster. There are books to read, mouths to feed, meetings to attend, corporations to fight or defend, new places to visit, starving children to save…who has the time? And yet it is precisely in not allowing ourselves the time to be “unproductive” that reality is insured to remain rigid and unchanging.

According to Hannah Arendt, the world, as opposed to the earth, is something man-made. It is planned out with the ideas from our heads and composed of the work of our hands. But without deep human relatedness, it is but a static “heap of things,” a hardened reality that we run around while remaining in the same place. What lends pliability to reality, she claims, as Freud did decades earlier, is taking the time to talk with one another without any predetermined purpose, without hurrying from one topic to another, without seeking solutions, and without skirting the real difficulty of actually communicating with one another. It is here that the continuing value of Freud’s discovery asserts itself. If psychoanalysis is dead — that is — if we no longer care about Freud’s problems, then so too is the human capacity to enact change.

I wouldn’t go along with the last sentence, but otherwise I think Fong hits on something vital not only about the continuing relevance of psychoanalysis, but about the continuing relevance of social innovation in general. What is great about psychoanalysis is precisely what so many psychologists and theorists have despised about it; it is a simple scheme for analyzing human behavior that rests on remarkably limited empirical support. Not unlike Abraham Maslow’s famous “hierarchy of needs,” there is a temptation to read Freud and think that human beings actually have “primary” and “secondary” processes that can be located somewhere in our anatomy. The truth is, we don’t — not any more than we have a need for shelter somewhere in our anatomy, as a reader of Maslow might suppose. Nevertheless, Freud’s framework offers an intuitive and often helpful means of thinking about the way we feel, and that is its lasting value.

To treat Freud as a psychologist, philosopher, theorist, or academic is to automatically subject his work to a level of empirical scrutiny in line with his profession. Indeed, this is what many of his critics have done, and they certainly deserve some credit for defending the rules and sanctity of their discipline. Yet, it always strikes me as odd that the implications of Freud’s work have not carried over with greater success into other, non-empirical modes of thought. One area where you would think Freud’s work would find greater traction is in social innovation — which I would roughly define as attempts to modify or amplify the way people interact, communicate and collaborate. I do not mean to suppose that social innovators should incorporate elements of psychoanalysis into their projects, but rather that they should be aware of the Freudian method.

Social innovation splits into two camps. In one camp are the commercial social innovators — those building products and platforms for profit and/or mass consumption. Twitter, Facebook, and LinkedIn are great examples. In the other, more interesting camp are all currently living human beings. We are all social innovators, or at least we all have the capacity to be. Fong does a nice job of explaining why this is the case; all social activity is predicated on a conversation between two entities, and if you invest any confidence in Freud’s theory, within each of us there is an internal conversation going on between two distinct entities. Valuable social innovation results from exploring this conversation, modifying it, and then amplifying it by way of our mouths and ears.

The human capacity to enact change is not precisely connected to “caring about Freud’s problems,” as Fong suggests, but it is precisely connected to caring about our problems. All useful social innovation, after all, is about solving a problem (hopefully an important one). And if we are diligent in our pursuit of the most basic — and therefore the most important — of our problems, there is no way to begin the search other than by looking inward, and listening.

The Housing Bubble’s Effect on Racial Segregation

Suzy Khimm at WaPo summarizes a recent study by Amine Ouazad and Romain Ranciere showing that the housing bubble of the 1990s-2000s actually increased racial segregation.

…Amine Ouazad and Romain Ranciere found that while black families tended to move to more integrated neighborhoods, upwardly mobile Hispanics were more likely to self-segregate. They tended to use easy credit “to buy houses in predominantly Hispanic neighbourhoods with the consequence of enrolling their children in schools with fewer black peers, and more Hispanic and white peers,” the authors write. By 2006, black students had 2 percent fewer Hispanic peers as a result. By contrast, Hispanic students moved to school districts “with about 1,600 fewer black students.”

Secondly, while blacks and Hispanics received more subprime mortgages, richer home buyers — who are more often white — received even more leverage, prompting them to move as well and reducing potential residential integration. So the racial segregation that’s linked to the wealth gap also continued.

It seems that two countervailing liberal ideals are being pitted against each other here. On one hand, increasing the social mobility of lower class blacks and hispanics is a good outcome, and if easy credit greases the wheels, then that’s reason to cheer. On the other hand, increasing racial segregation is generally thought to be a bad outcome. If a good thing somehow caused a bad thing, we are all supposed to throw our hands up in the air and wonder why.

But is racial segregation really an evil under all circumstances? Typically we think of segregation in the context of the late 19th and early 20th century south, where blacks were institutionally segregated from whites and also had a remarkably low degree of upward social mobility. If mechanisms had emerged in, say, the 1920s to increase homeownership among southern blacks, it hardly seems correct that we would bemoan a situation in which many of those blacks opted to move into homes in predominantly black communities. In other words, it doesn’t make sense to worry about an increase in social mobility simply because it is not also promoting an abstract ideal of racial integration.

The concept of segregation can sometimes be a bit of a red herring in racial politics. Society should not worry about what kinds of neighbors different people want to have; if Italians want to live around other Italians, that is their right. We should worry, however, about a situation in which certain groups of people systemically lack the legal and/or financial means to choose what kinds of neighbors they want to have. That was the real problem with segregation in the south, and it’s the real problem that continues today with low-cost housing in many urban areas. But the same can hardly be said of the housing boom of the aughts.

The Higher Costs of Higher Education

Robert H. Frank weaves a number of different ideas together in an article about the rising costs of higher education. Many people will hone in on Frank’s recommendation at the end of the article for higher tax rates on higher-paying jobs:

We might consider taking more direct aim at the component of tuition inflation that is attributable to growing salary gaps. Raising taxes on top salaries would be a good idea for American society in general, and not just for higher education. It would not only shrink the effect of salary disparities, but would also generate some much-needed revenue.

The really critical part of the argument comes a little earlier, however, when Frank discusses the connection between tuition growth, academic prestige and graduate starting salaries:

Because universities are already rushing to use technologies for improving faculty productivity — for example, Web-based review sessions and homework evaluation — subsidy reductions won’t encourage much additional progress against Baumol’s disease. But there’s a second major source of tuition growth that universities are less able to ameliorate on their own: the escalating competition for academic prestige.

This phenomenon is rooted in the growing disparities in graduates’ starting salaries, which resemble those we’ve seen for the country as a whole. After adjusting for inflation, starting salaries for most graduates have remained essentially stagnant for several decades, while those at the bottom of the group have actually declined. Only the highest-paid graduates have enjoyed significant salary growth, and among those a very thin slice at the top has seen truly spectacular increases.

I’m not convinced that this an appropriate way to frame the issue. The desire for academic prestige is one factor that allows prestigious universities to collect high tuition from students; many students want to go to Harvard, Yale and Princeton for the prestige and the career prospects, and that demand sustains higher tuition costs at those schools. But it’s not the case that prestige is what’s driving higher college admissions — or higher tuition rates — across the board, especially at smaller schools and state universities where there is less of a prestige factor. College admissions have increased over the past few decades for a variety of reasons — a growing middle class, federal subsidies, a greater cultural emphasis — and the increased demand for college education has driven costs up.

One point to note, therefore, is that growing tuition costs generally signal good and improving socioeconomic outcomes for middle class households; it means that more middle class kids are going on to higher education and their families can afford to spend more on their educations, even if it is painful to do so. My hunch is that the middle class realizes this implicitly, and that has fueled the belief that college — more than merely an investment, training, or even education — is a life stage. To skip this life stage, or to admit that it is unaffordable, is to fall behind the Joneses, which is simply anathema to most American families.

The prestige chase is, in my mind, separate from this issue of a rapidly inflating cultural attitude about higher education. Bringing down tuition costs isn’t going to be about some cat and mouse game between college administrators and federal agencies over subsidy levels, it’s going to be about adjusting the belief that every middle class kid has to go to college come hell or high water. All of a sudden, we have a glut of college graduates in this country, and yet somehow we can’t seem to fix roads or build bridges in a time of high unemployment. There’s a piece missing, and I suspect it has exactly nothing to do with tuition costs at Ivy League schools.

The Agency Dilemma in American Politics

Richard Cohen has a piece in the Washington Post about the insidious effect of Sarah Palin on the field of Republican presidential contenders:

Since Since Palin…ignorance has become more than bliss. It’s now an attribute, an entire platform: Vote for me, I know nothing and hate the same things you do…

So far, the Palin effect has been limited to the GOP. Surely, though, there lurks in the Democratic Party potential candidates who have seen Palin and taken note. Experience, knowledge, accomplishment — these no longer may matter. They will come roaring out of the left proclaiming a hatred of all things Washington, including compromise. The movie had it right. Sarah Palin changed the game.

Plenty of political scientists will tell you that political identification nowadays has a lot more to do with common dislikes than likes, and Sarah Palin is a great example. Her brand of politics centers on rejection — abortion, gay marriage, Washington elites, Barack Obama, basic understanding of facts, etc. — and lots of people evidently identify with that. Still, representative selection, as we’ve seen, becomes difficult with a field composed of candidates like this. At some point, Republican voters need to choose a nominee to face off against Barack Obama in November, and more broadly, to carry forth the ideals of the conservative movement, but it’s hard to identify the best individual to do that among a group of candidates who are all advancing the same wide-ranging view that everything needs to go.

As an analogy, if you are a shareholder of a company that is searching for a new CEO, and all the interviewees for the position talk only about what they hate about the company and the previous CEO, it becomes difficult to decide who the best person is for the job. Using stock as compensation is a common solution in that scenario, but it’s unclear how that would apply to representative selection in politics. Theoretically, the ideal scenario for Republican voters would be just the same: that they could offer their candidates stock in the conservative movement — however that is defined — such that whoever they chose would have to advance their agenda. But defining the agenda to be advanced is the tricky part. Mitt Romney is against taxes and healthcare reform, Rick Santorum is against abortion and gay marriage, Newt Gingrich is against taxes and healthcare reform, Ron Paul is against the Fed and monetary stimulus. Even if Republican voters could come to a consensus that the conservative movement is purely about repealing, who is going to decide exactly which policies need to be repealed?

Part of the problem here is with the institution of the presidency and the American style of democracy in general. We talk a lot about political identification — about how voters identify with this or that candidate — because voters don’t really have another way of doing things. Shareholders in a company simply want to choose the guy who says, “I’m going to make this company successful,” and it doesn’t matter what he looks like or how he talks or how blond his wife is. Politics in this country has become so much about personality that these kinds of issues often take precedence over the act of assessing who is going to make a particular movement or agenda successful. And it’s just as much a problem for Republican voters as for any other reasonably broad voting bloc.

Goldman Sachs and its Discontents

One line of rebuttal to Goldman Sachs executive Greg Smith’s resignation letter so far has been to say that Smith is actually just bitter about being a top guy in a business division that the company is phasing out. Says Matt Yglesias:

Everyone is talking about Greg Smith’s scathing exit attack on Goldman Sachs, accusing the firm of moral decline and a lack of interest in serving its clients well, and what strikes me is that Smith avoids a clear statement of the basic issue. Once upon a time Goldman was a firm that was pretty overwhelmingly in the business of advising clients. It’s hard to succeed in the client-advising business unless clients feel that you’re giving good advice. But over the time span Smith is describing, this whole portion of the business has shrunk relative to trading.

I don’t know enough to quarrel with this analysis (i.e. is there any empirical evidence to show that Goldman’s client-advising business has shrunk relative to trading?), but it seems doubtful to me that this shift is really the “basic issue” to anyone except people who work in either client-advising or trading units at Goldman Sachs. Let’s face it: this letter was published on the Op-Ed page of the New York Times, not on Goldman’s intranet, so Goldman employees are, at most, only a small fraction of the intended audience here. And to people outside the company, it does matter why such a shift has occurred, not just that it has occurred. In any case, it seems overwhelmingly doubtful to me that Smith’s main gripe has anything to do with how the firm has shifted its business focus in recent years.

I am desperately trying to think of a useful analogy for Yglesias’ argument, which basically amounts to a grossly ad hominem attack on Greg Smith and his job title. The best I can come up with is something like this: let’s suppose that I am a deli owner, and after a couple years of doing business the normal way — selling sandwiches, chips, drinks, etc. to customers — I find that it is much more profitable to run an inventory exchange with other local delis and food stores. Each month, I give them some of my inventory and they give me some of theirs, each of us hoping that we are faring better in the exchange and therefore gaining a favorable market position. Let’s then suppose that one of my cashiers gets upset about this becoming the new focus of the deli’s business and posts an angry letter in the local paper about how Jasper’s Deli no longer cares about its clients. I could respond by saying, “That’s what we’re doing, because it’s better for our bottom line, so get over it,” which is basically how Yglesias urges us to respond to Smith. But it seems just a tad too matter-of-fact to silence this kind of complaint without any accounting of the moral consequences of such a shift.

My sense is that if you deliberately move away from the business of serving your clients, then it’s most likely the case that you don’t care about your clients. Contrary to Yglesias’ analogies, Google has not done that, nor has Apple (nor is it clear why the activity of two technology companies has anything to do with Goldman Sachs). Yes, companies adjust their emphasis on various products and services that they offer all the time, but that doesn’t mean that they move away from serving clients altogether. And this, I would say, is the basic issue with Goldman Sachs and many of its competitor firms; there is a question as to whether the core businesses of these types of institutions add value to anyone except for shareholders and employees. This isn’t about Greg Smith’s unlucky career track, or the bland and uninteresting fact that Goldman Sachs has a different strategic focus than it did twelve years ago. It’s about the dubious morality of a company deliberately jettisoning its client-centric operations, and the public’s vested interest in knowing what that company’s raison d’etre has since become.

Taxing the Fat

Peter Singer discusses the merits of taxing fat travelers:

Tony Webber, a former chief economist for the Australian airline Qantas, has pointed out that, since 2000, the average weight of adult passengers on its planes has increased by two kilos. For a large, modern aircraft like the Airbus A380, that means that an extra $472 of fuel has to be burned on a flight from Sydney to London. If the airline flies that route in both directions three times a day, over a year it will spend an additional $1 million for fuel, or, on current margins, about 13% of the airline’s profit from operating that route. 

And the justification:

…the point of a surcharge for extra weight is not to punish a sin, whether it is levied on baggage or on bodies. It is a way of recouping from you the true cost of flying you to your destination, rather than imposing it on your fellow passengers. Flying is different from, say, health care. It is not a human right.

Whether or not it’s a concern of Singer’s, I can’t envision this type of measure doing much to promote public health. I think you would just begin to see fewer fat people using air travel. Depending on how you went about quantifying “fat,” you might end up producing a net loss for airline companies if enough of their customers stopped flying. Or you might not. Whatever the case, I don’t think you would see a lot of fat people changing their diets and taking out gym memberships in order to avoid surcharges on flights; most of them would just use alternative means of transportation.

There are two separate ideas that seem to run together in Singer’s argument. One is about incentivizing people to be healthy. The other is about enabling airline companies to collect the appropriate level of fares from their customers given their weight. You could envision plenty of policy actions that get at the first goal, but it is unclear why, if the goal is really to improve public health, the incentivizing mechanism should have anything to do with air travel. Do fat people really like flying that much?

As for the second goal, there are plenty of ways for airline companies to repair their balance sheets without enacting discriminatory fares. Raising fares across the board — not just on overweight passengers — has been a common method. Bankruptcy, capital-raising, and mergers have been other methods.

The differential weight of passengers is a concern that is endemic in any airline business (or any mass-transit business, for that matter), just as is the price of gas, the price of food, the price of aluminum used in fabrication, and the weather. For comparison, commercial farmers in certain parts of the world have to worry much more than they used to about the ill effects of soil pollution and disadvantageous growing weather as a result of years of unsound environmental practices. Homeowners in various parts of the country have to worry more than they used to about the risk of default and foreclosure, given the current level of instability in the economy brought about by any number of factors. In other words, there are certain recurring challenges associated with almost any type of economic activity. Some of those challenges get worse with time, some of them don’t. But I don’t see why, among all these concerns, we should focus our attention — or policymaking efforts — on making up for low revenue at airline companies, and in so doing, discriminate against fat people. Is that a top goal on anyone’s political agenda?

Aside from that, I completely agree with Singer that improving public health and reducing obesity are important goals that we should fund and pursue with maximum vigor. But I have a hard time seeing what any of that has to do with air travel.