Reliable Health Care is about Economic Freedom

Jonathan Cohn’s Bloomberg View column on the Supreme Court’s pending health care ruling raises a critical, though I think under-appreciated, point about health care and economic freedom. Cohn offers background:

As they await the Supreme Court ruling on the Affordable Care Act, legal critics of the law say their case is about liberty. If the government can instruct people to obtain health insurance, they keep asking, what’s to stop it from requiring them to buy broccoli?

But the real threat to liberty in this case isn’t a hypothetical broccoli law. It’s the problem that the mandate remedies — the failure of the health-insurance market — and the long-standing national crisis of rising health-care costs that Congress finally found a way to address.

The conservative reproach of the health care law has hinged on this fairly paranoid — but not completely groundless — fear that if the government’s power to force people to buy health insurance is judicially affirmed, then eventually the government will begin forcing people to buy broccoli and all manner of things. As a thought experiment, it’s amusing to wonder, if the exact same law had been passed by a conservative president (which is conceivable given its parallels to Massachusetts’ Romneycare), what kind of legal and/or economic defense would have been given? One can imagine that defense having something to do with the law’s ability to promote greater economic freedom and better macroeconomic outcomes.

Most Americans currently obtain insurance through their employers. People who are unemployed, employed part-time, or on a wage basis often do not have access to the kind of insurance that full-time workers enjoy. Full-time employees who are considering leaving their jobs, for whatever reason, thus face not only the prospect of a loss in income but a loss in health coverage. This creates a rather serious incentive for people not to change jobs, not to invest their money, not to start companies (and create new jobs), not to further their education, not to take on additional debt, and generally to be as economically risk-averse as possible. That is precisely the opposite kind of economic environment conservatives seek to promote, at least as far as the public record goes. On the employer side, the situation isn’t much better. The growing costs of insuring employees creates a disincentive for large and small businesses alike to hire new employees, which impedes growth and contributes to high unemployment.

A conservative defense of an Obama-style health care law, I’d have to imagine, would focus on the advantages of mitigating the workforce’s persistent concerns about health care. If your argument for improving the economy is that government needs to create the conditions for people to take more risks, create more jobs, and invest more, then it seems to me you need to actually take the steps to create those conditions — not just engage in a lot of hand-waving while taking lobbying money from the health insurance industry.

Manufacturing and the April Jobs Report

Felix Salmon writes that the April jobs report is “miserable”:

…it’s basically just enough to keep up with population growth. That’s the number the markets look at. The number the politicians look at, however, is the unemployment rate, which ticked down to 8.1%. That’s still high, but it’s not a statistic to beat Obama round the head with.

Matt Yglesias adds:

Manufacturing was a bit of a disappointment in the April jobs report, growing quite slowly despite a lot of indicators from output measures that America is making a lot more stuff. To add to my surprise at the lack of hiring, look at this charge of hours worked in the manufacturing sector as of the March report…

That all seems to further build the case that we’re due for a hiring surge since it doesn’t really make sense to try to keep piling on overtime. But if firms are worried that demand may not hold up, that can make them hesitant to add workers.

I think it’s important not to draw too many conclusions about the health of manufacturing based on one month’s numbers. The general long-term trend in our economy is towards less manufacturing and more exchanging of services (particularly non-physical ones). Some of this has to do with the fact that the American workforce just isn’t as keen on making microwaves and refrigerators as they were fifty years ago, but another issue is demand. With the increase in quality and durability of most consumer goods, the market can’t sustain a consistently high level of output of things like microwaves and refrigerators — they just last too long. I’ve had my GE refrigerator for more than ten years, for example, and it’s doing just fine. That strikes me as way too low a rate of obsolescence to support a growing workforce in refrigerator manufacturing.

Of course, politics tends to obfuscate these kinds of economic realities, particularly in an election year when nostalgia about the good old days of American manufacturing tends to reach a high point. The truth is that we are never again going to manufacture things as prolifically as we did in the 1950s, and firms are indeed right to be worried that demand will not hold up. As the economy hobbles back on track, we may continue to see productivity spurts in the manufacturing sector on a month-by-month basis, but I don’t think anyone would argue that manufacturing is a growth industry at this point in the country’s history, and thus I don’t see any reason to get too giddy about any one month’s numbers.

There’s a secondary question about whether services can even be counted on as a growth sector. Some people have argued that what is needed to bring down unemployment is progressive housing policy, public transit subsidies, and the like that would allow for higher-density occupancy in urban areas, which would thereby ease the exchange of services and support a larger workforce. But I think it’s doubtful that things like nannying, haircutting, and even the restaurant industry are going to be the main planks of growth in our economy for any substantial amount of time. We don’t cut our hair that often, and we already eat out enough.

One notion for the sustainable growth of the economy is that we need to engage in a much higher volume of exchange of relatively useless, zero-carbon-footprint goods. To some extent this has already begun with the proliferation of digital software and delivery devices. There are, of course, barriers to entry here; not everybody knows — or wants to know — how to use an iPad to read their favorite periodicals, nor do most people know how to become a seller or producer in this market. Yet, the potential scaleability of this kind of commerce is much greater than commerce in refrigerators or $11 cheeseburger lunches.

People will, presumably, always need to cut their hair and keep their food fresh, but manufacturing and physical service may have already achieved a level of sophistication and efficiency that prevents much further growth. If the national discussion is genuinely about how to sustainably bring down unemployment and grow the economy, it only makes sense to look to a new kind of commerce paradigm that can grow sustainably — and ideally with minimal impact on the environment.

The Concrete Challenges of Health Care Progress

Matt Yglesias describes his health insurer’s new website:

People are always very down on the health care sector, but I thought I might note that ever since I started my new insurance plan at Slate I’ve noticed that Kaiser Permanente is actually doing a lot of useful productivity enhancing stuff with information technology. Now Kaiser is a famous and famously “special” health insurer, but none of what I’m talking about is particularly related to their integrated care and health management focus. Instead it’s stuff like they have a pretty well-designed web interface that lets you book appointments with your doctor. You can also email your doctor if you have incidental questions. And you get copies of lab results emailed to you after you get a test done. The same website includes a lot of basic health information that you can play around with so you can try to self-diagnose if you’re feeling bad.

Aetna, the health insurance provider my employer offers, also has a sleek new website that uses modern layouts and enables all kinds of user-automated processes like doctor lookups, primary care provider designations, claim tracking, personal health reports, self-diagnostics, and so on. I would tend to agree with Yglesias that this is not a trend confined to just our two insurance providers — probably most of the big names in the industry have brought their websites up to speed with the current standards over the past year or two. Certainly this is a welcome change, especially for younger folks such who have only recently started covering their own insurance and who have also come to expect a certain type of web experience after growing up with Facebook and Google.

The only problem is that I think this has precisely nothing to do with structural improvements or cost-cutting in the health care sector, and perhaps this is best illustrated by an anecdote. I had a routine check-up with a local doctor about three weeks ago. The scheduling part was a breeze. After receiving an ID card from my employer, I created an online account, looked up in-network doctors in the area around my office, was able to read descriptions about each one of them (including their bios and areas of expertise), and then scheduled an appointment — all on Aetna’s website, in the space of about five minutes, from my computer at home. It couldn’t have been much easier. But when I got to the doctor’s office the following week, it was a different story. The waiting room was crowded, the doctor and his assistants seemed overworked and stressed out, my physical was thorough but couldn’t have been completed much quicker, and my co-pay was high.

Thankfully, I am young and healthy, so I don’t need to worry too much about these things. But it’s important, I think, to be able to separate aesthetics from concrete realities. Insurance companies obviously have the resources to make their websites look nice, but that doesn’t mean that health care is suddenly being administered in a more efficient or cost-effective manner to anyone, let alone the people who really need it. It’s also worth pointing out that Yglesias and I — both young, healthy and employed — are members of a small contingent for whom health insurance works pretty well. But that, again, has little to do with burgeoning costs in health care overall.

Yglesias tries to turn this into some sort of moral about how the private sector institutions, if left untouched, will eventually come around to adopting all of the practices that consumers and government have wanted them to adopt all along. I don’t see much evidence that this typically happens in other industries, and I don’t hold out much hope that it will happen in the health insurance industry. The status quo isn’t just a product of septuagenarian industry executives defying the young techies who know better and forcing their luddite sensibilities down everyone else’s throats; it’s about preserving a business model that everyone knows is highly profitable.

If health insurance reform were solely about persuading insurance companies to make it easier to schedule a doctor’s appointment from your computer, there never would have been a moment of real debate or resistance. But in the actual effort to bend the cost curve of health care, there a number of moving pieces — not least critical of which is the profit motive of the insurance industry.

A President in Love

A lot of details about Barack Obama’s past girlfriends, twenty-something love life, and early encounters with poetry have been coming out over the past day or so, and while I think the hyper-intellectual love letters are nostalgic and sweet, what intrigues me more is the vision of Obama’s political worldview taking form. Take this note, for example, which he wrote to girlfriend, Alex McNear, in the summer of 1982:

I haven’t read “The Waste Land” for a year, and I never did bother to check all the footnotes. But I will hazard these statements—Eliot contains the same ecstatic vision which runs from Münzer to Yeats. However, he retains a grounding in the social reality/order of his time. Facing what he perceives as a choice between ecstatic chaos and lifeless mechanistic order, he accedes to maintaining a separation of asexual purity and brutal sexual reality. And he wears a stoical face before this. Read his essay on Tradition and the Individual Talent, as well as Four Quartets, when he’s less concerned with depicting moribund Europe, to catch a sense of what I speak. Remember how I said there’s a certain kind of conservatism which I respect more than bourgeois liberalism—Eliot is of this type. Of course, the dichotomy he maintains is reactionary, but it’s due to a deep fatalism, not ignorance. (Counter him with Yeats or Pound, who, arising from the same milieu, opted to support Hitler and Mussolini.) And this fatalism is born out of the relation between fertility and death, which I touched on in my last letter—life feeds on itself. A fatalism I share with the western tradition at times. You seem surprised at Eliot’s irreconcilable ambivalence; don’t you share this ambivalence yourself, Alex?

A certain kind of conservatism that he respects more than bourgeois liberalism? This sounds strikingly familiar to the Obama we have known as president. He doesn’t say precisely which kind of conservatism he respects more, or why, but it’s clear he holds a certain level of contempt for protest-happy, sign-waving liberals who don’t have any real skin in the game of political discourse, and also that he respects the virtue of humility enough that he is not prepared to totally write off conservatism. Bourgeois liberals have their ideals, for sure, but they aren’t grounded in the “social reality/order” of their time in the way that Eliot was, or that conservatism broadly was, or that Obama felt he was, perhaps. So what is it precisely about Eliot that Obama respects? Is it merely that he’s grounded? Is that he accepts the ambivalence between order and chaos, purity and brutality? Is it that he remains stoic in the face of these intractable dualities?

These are questions that must have been difficult for the young Obama. Having come from humble, almost hardscrabble roots, and then having been suddenly thrust into the bourgeois, urban whirlwind of Columbia University in his early twenties, all the while trying to sort out his racial, political, class, and intellectual identity, he nonetheless grapples with these issues with a profound degree of sensitivity and introspection — qualities that persist in him to this day. And what appears to be taking form in this letter is his taste for ambivalent pragmatism, an intellectual and moral disposition that has also characterized a great deal of his political career. He is not an ideologue, not a zealot, not willing to commit, for better or worse, to any of the extremes of social order, politics, or even sexuality (notably, there is no mention about race here). But that doesn’t mean that he denies the existence — indeed the permanence — of those extremes and the tenuous prospect of standing between them. Contrary to the notion that ambivalence is weakness, Obama wants to believe that resisting the centrifugal pull of extremism is what gives a person strength.

Where Obama appears to part ways with Eliot is in his rejection of “deep fatalism.” Obama has always revealed himself in political life to be an optimist — sometimes, it must be said, without the level of grounding that his base would appreciate — and this has perhaps allowed him to avoid being swooped up into a reactionary mindset. Curiously, he says he shares a fatalism with the western tradition, but this, I think, is less a personal embrace of fatalism than a historical awareness of how fatalism enabled the rise nazism and fascism in the west during the twentieth century. Fatalism is the evil, rotted outcome of ambivalence, whereas optimism is the good, strong, progressive outcome. Don’t be surprised at Eliot’s “irreconcilable ambivalence,” Obama implores, as if to say, “don’t be surprised at me.”

Incentives Matter to Risk-Takers and Entrepreneurs

Adam Davidson sketches Mitt Romney-Protégé/Bain Capital veteran/amateur economic theorist Edward Conard in the NYT today. The piece is awash in the sort of exasperating economic fallacies that wealthy conservatives love to tout, and it’s no wonder that Conard — with his suggestion that income inequality “is a sign that our economy is working” and generally a cause of positive economic outcomes — has everyone talking.

The obviously, and boringly, fallacious stuff comes at the beginning, such as the notion that achieving great wealth is purely about ingenuity and talent rather than rent-seeking, informational asymmetries, or just plain ripping people off. None of that amounts to much in the way of new ideas, and even if it did, it would still be both theoretically and empirically wrong.

The more interesting of Conard’s claims is that income inequality contributes to better long-term economic outcomes for the middle and lower classes. This is also wrong, but more intriguing than just a jaded defense of the wealthy. On an empirical level it’s wrong because income inequality has steadily grown over the past thirty years, and yet there’s little to suggest that households that have seen stagnant or declining incomes during that period have simultaneously seen significant improvements according to other socioeconomic indicators. One would have to ask, if inequality promotes positive long-term economic outcomes for those on the losing side of inequality, how long-term are we talking?

On a theory level it’s even more wrong. It might be true to say that the wealthy spend and invest more than the middle and lower classes. But it doesn’t follow that in a more unequal society, there will necessarily be greater overall levels of saving and investment. Conard might want that to be the case because that would bolster his claim that inequality promotes a savings and investment-rich environment that spurs a high level of entrepreneurial risk-taking and business innovation. But it doesn’t follow simply from the premise that the wealthy typically save and invest most of their money, and indeed there are several countries which are both more socioeconomically equal than the U.S. and also have higher household savings rates.

I think part of Conard’s problem is a deep level of confusion about incentives. He seems to assume that placing a huge and growing portion of the population into a challenging socioeconomic state would uniformly incentivize them to take certain actions that would end up improving the economy and their general lot in life. That’s a nice idea, but in reality not everyone responds to that incentive in the particular fashion that Conard hopes for. Perhaps he or Mitt Romney or a host of other successful, private-equity types would respond that way, or maybe not. In either case, once you make that kind of claim you are getting into a game of vindicating certain personality types rather than presenting a coherent set of conditions for economic growth.

Mark Zuckerberg’s Math Problem

With Facebook’s Q1 earnings dropping off rather sharply from the previous quarter and its IPO still looming this month, it may be time to ask in earnest whether the company’s $100 billion valuation adds up. Matt Yglesias offers an intro:

…if $205 million per quarter—$820 million per year—represents Facebook’s steady state operations then a $100 billion valuation would give the company a price/earnings ratio of over 120. That would be absurd for a mature company, but the idea would presumably be that Facebook is going to grow a lot. Where the math gets tough for Facebook is that it’s already a really big company with 900 million users. If its profits double then double again then double again then at $100 billion it would have a PE ratio of 15, which conveniently is the market’s long-term average. On the other hand, if Facebook’s user base doubles then doubles again and then doubles again it would have 7.2 billion users. That is approximately the entire current population of the planet. And of course some of those 7 billion people are small children, subsistence farmers, or toiling in North Korean labor camps, while a rather large fraction live in the People’s Republic of China where they’re already on an in-house Facebook substitute.

In other words, if you assume that Facebook’s per-user earnings are stuck where they are, there would literally not be enough people on the planet to allow the company to achieve a market-average PE ratio at a $100 billion price point. In any case, a user base of 7 billion is a theoretical goalpost that Facebook could never actually hope to achieve; its user base already appears to be leveling off just shy of 1 billion. So under the assumption that Facebook’s per-user earnings are fixed, Mark Zuckerberg has a math problem on his hands: on the one hand, he needs Facebook’s earnings to grow, but on the other hand, the traditional business model of boosting earnings in direct proportion to user base is approaching an intractable upper limit. Thus, if you are Mark Zuckerberg, you have to discard the assumption that per-user earnings are fixed, and then figure out a practical way to increase earnings with the existing user base.

All of which is to say that Facebook is going through puberty of sorts; it still has a long way to go before it becomes a mature company by market standards, but it can no longer hope to grow simply by adding more and more users. That means that this is a vital moment for innovation within the company. Facebook is already popular and successful, but Zuckerberg and his team now have to figure out ways to monetize the user base in new ways without alienating existing users (Google+ is still out there, after all). Many people expect that new earnings will depend on advertising — and certainly there are plenty of ways for Facebook to make money with ads — but the question is whether they can make enough money with this new approach without driving away a lot of current and/or prospective users.

If you’re hoping to make money as a Facebook investor, you have to believe that Mark Zuckerberg will be able to figure this one out. That may not be an altogether risky proposition if you factor in that Facebook itself is based on Zuckerberg’s somewhat prescient understanding of what people want and how they behave on the internet. Those being two core principles of effective advertising, it would seem that the pieces are already in place.

Yet, one potential pitfall is that Zuckerberg has revealed himself to be a bit of a purist, a la Steve Jobs. Expanding the scope of what your business does — and thus the earnings — is a feat that Jobs achieved with rare mastery while he was chief of Apple, but there may be a temptation in the case of Facebook to just enter a lot of different markets, which could dilute the original mission of Facebook (however that might be defined). Needless to say, Zuckerberg will be reluctant to do this, even if it portends greater earnings. The difficult part of his job will be to balance his taste for purity with the market’s demand for better and better earnings. Facebook, after all, is not an advertising company and was never intended to be. No one knows this better than Zuck. To make advertising Facebook’s main revenue-generator would critically alter the company, unless it could be done in a way that directly tied into the company’s core functionality. How do you make Facebook much more profitable while keeping Facebook what it is? That is the challenge I suspect the management team is hard at work trying to figure out.

Huge Failings of Corporate Governance

The details about Parliament’s report on the News Corp. phone hacking scandal are starting to pour out, and though it would be hard to condone even a moment of sadness for the Murdoch family, I can’t help thinking about how crushing this must be for Rupert Murdoch. The tenor of Parliament’s accusations thus far have been that the years of phone hacking, epitomized perhaps by the Milly Dowler case from ten years ago, amount to “huge failings of corporate governance.” Which is basically to say that what happened was so loathsome, and yet so generally known about within the upper ranks of the company, that there is simply no possibility that these were the isolated actions of a few rogue reporters at the now-defunct News of the World and that none of the higher-ups knew what was going on. The Murdochs, in other words, had to have been aware of this for quite some time and done precisely nothing to stop it.

That has been the scope of Parliament’s condemnation thus far, though I think that amounts to little more than a baseline insinuation of guilt, and the blunt reality — though not necessarily surprising — is somewhat more disturbing. Did Rupert Murdoch know that phone hacking was a standard practice at his subsidiary? Probably. Did he openly encourage it? Possibly. Whatever the case, I think the reporting tactics — if they can be so called — at News of the World that are now coming to light, contain the Murdoch hallmark. Who knows to what extent it will ever be proved that he encouraged this kind of behavior in a traceable, verifiable manner. But it was precisely his pitbullish hunger — to pervert the methods of journalism, to trespass into the dark corners of abuse, exploitation and smut, and to build an empire — that defined the company and its subsidiaries and made News Corp. what it is today. And now it may be that same mentality, and its resulting ills, that eventually cause his undoing. The question of whether he technically knew about the phone hacking may be legally relevant, but it hardly seems as though he would have needed to know about it in order for him to be guilty of fostering a particular culture and way of doing things at his company (which were, for decades, remarkably successful).

So it must be wrenching for him to experience this. Not because people at his company and in his family are being accused of wrongdoing, but because it is a public indictment of the traits that have made him and his company what they are today, and he is perhaps uniquely situated to realize that.

Fixing Old Roads Before Building New Ones

Ezra Klein discusses the politics of fixing the nation’s roads:

…Right now, most transportation money isn’t used to fix existing roads and highways. Politicians always prefer to build shiny new roads — there’s a big ribbon cutting, and drivers don’t get inconvenienced by orange cones and repair crews. Currently, 57 percent of all state highway funding goes toward new construction, even though this represents just 1.3 percent of the overall system.

UCLA economist Matthew Kahn and the University of Minnesota’s David Levinson have made a more detailed case for a “fix-it first” strategy for transportation spending in this paper. Right now, they note, federal highway spending doesn’t usually get subjected to a strict cost-benefit analysis, and there’s usually pressure to build new roads and bridges rather than maintain existing ones. And, Kahn and Levinson find, this doesn’t make good economic sense — it’s usually much cheaper to fix a road earlier on than to wait for it to deteriorate into “poor” condition.

In addition to showing why transportation spending needs to be rethought, I think these findings also indirectly demonstrate why raising the gas tax is generally a good idea. If you combine a higher gas tax with a “fix-it first” strategy, states would have the financial resources to repair roads and save drivers money, perhaps even enough money to offset the additional cost of the tax, which would end up being an economic break-even (if not a gain) for taxpayers. Of course, raising the cost of getting places — essentially what the gas tax does — is politically difficult, particularly in a low-employment environment where many people already fear for their livelihoods. Also, using gas tax revenues to ease auto transportation would end up being a less-than-desirable compromise for folks who ideally view the gas tax as a way of incentivizing more people to use public transportation. But sometimes policymaking requires compromises, and in any event, I can’t imagine a sincere “Let’s Fix America’s Roads” campaign falling on deaf ears with any constituency in any state.

Another possible benefit here, however, is that repairing old roads before building new ones means that, in all likelihood, there wouldn’t be as many new roads, which would be a good thing. Auto transportation tends to be a virulent contributor to sprawl, which depending on whom you ask, tends to be a virulent contributor to pollution, poor labor specialization, and ultimately unemployment. The general theory, which Matt Yglesias lays out nicely in The Rent Is Too Damn High, runs like this: auto transportation contributes to sprawl, which contributes to the labor force being more spread out, which forces people to spend more money on fuel and makes it difficult for people to sell their labor and/or services efficiently, which contributes to unemployment. Essentially, an automobile-centric transportation scheme creates a balance sheet problem for many people and incentivizes people not to specialize. That is why in places like New York City, which have high-concentration housing and robust public transportation, labor specialization is high and unemployment is low compared to the rest of the country.

Long term, rising fuel and/or housing costs might exacerbate this problem to a point at which the whole paradigm would need to be reworked, but in the short term, I don’t see any political or economic reason not to take the obvious step of using taxpayer funds to fix existing roads. Car-owning voters would get a good deal for their buck, and sprawl — one of the key factors contributing to a looming economic problem — would not be actively increased.