Will Fiscal Policy “Fight the Last War”?

Fighting the last war is a metaphor for doing what used to work even though times have changed. For example, French generals in 1940 expected World War II to be like World War I, so they ended up fighting German tanks with French foot soldiers inside forts.

I have been worried about this with U.S. fiscal policy for the last 20 years or so. And it turned out badly in 2007-9, and I think it might turn out worse the next time around. Scott Sumner, writing at EconLog feels the same way.

Because the U.S. is a federalized government, a significant amount of government spending is done at the state and local levels. And, while we don’t stress this detail too much any more, the basis for Keynesian fiscal policy being effective starts with the government actually buying goods and services, not with sending checks to people. So, while a lot of funding for state and local expenditures actually passes through the federal government, its sent right on as a check to the state and local governments. They spend between half and 2/3 of the government spending in this country that goes to goods and services. So, if Keynesian fiscal policy has any relevance in the 21st century, it’s because of spending a that level.

Which scares the crap out of me.

The reason is that at the state and local level, fiscal policy has been taken over (for a few decades), by both Republicans and Democrats, who view balanced budgets as the way to go.

The problem with this is when a recession hits: your tax revenue goes down, and your spending requirements (for welfare and so on) go up. If you have to balance the budget this means you have to raise taxes and cut spending actively, because to offset the passive movements in the other direction from the business cycle.

Here’s how Sumner sees this panning out:

I don't have much confidence in the Keynesian view that the stance of fiscal policy has a big impact on the business cycle. But let's say I'm wrong. Here's what I expect to happen:

1. The President and Congress will enact deep tax cuts and increases in military spending, which will cause the deficit to balloon. Entitlement spending will also rise as boomers retire.

2. The deficit will rise to unsustainable levels, with the national debt steadily increasing as a share of GDP.

3. By the time the next recession is on the horizon, there will be a political backlash against expansionary fiscal policy. Policy will tighten and become effectively pro-cyclical.

I hope that I am wrong, but this is the danger I see from running a series of large budget deficits when the unemployment rate is 4.5%. What will we do if unemployment rises to 7.5%?

I agree. And I have some hard-ish evidence to support this. In 2009 I got a call from a member of the Utah Legislature from this region. They wanted to know if this was a good time to start spending out of their Rainy Day Fund. I was flabbergasted. If the worst recession in a generation isn’t a time to spend your rainy day fund, when is?

Why Macro Is So Hard: What Passes for an Expert

This is actually an addendum to a topic that’s already part of the canon (here’s an example, and it’s been in the principles lecture on this topic for years).

So, here’s Deadspin’s headline from another example:

Florida's Go-To Stadium Economist Is A Hack,
A Shill, And Also Not An Economist

Everyone should know by now that sports stadiums and arenas are a very bad investment for their communities (and everyone around SUU should absolutely know this, given how much Berri, Price, and I repeat it).

In this particular case, Tampa is building a stadium for a team that doesn’t even have Tampa in its name.

Wha, wha, what?

Tampa is building a stadium for the Toronto Blue Jays to use for spring training.

(Now, if you’ve never been to spring training, it is a thing, but not a big thing. We’re talking about 15 or so games, held over 5 weeks, that average about 5K fans a piece.)

For perspective, Tampa is spending 4 times on this stadium what SUU is spending on new business building.

Maybe one reason is they hired a consultant who produced an economic report indicating that it was a good way to spend their money:

If Bonn’s studies don’t sound very economically robust, perhaps it is because Bonn isn’t actually an economist! He is a professor at FSU’s school of hospitality, where he teaches marketing and wine-tasting, and his degree is in resource development.

Which doesn’t necessarily mean Bonn can’t do the economic work; I also do not have a degree in economics. Then again, I don’t charge $23,000 for economic impact studies …

For clarity, Bonn wrote the report, and the “I” in the quote is the author of the linked piece on Deadspin.

Paying for Healthcare

In tandem with the previous post, now that healthcare is a major macroeconomic policy issue, it’s useful to think about why people won’t pay for their own healthcare, and should the government?

America is a useful example for the rest of the world. We are rich, so more people here can afford healthcare. Yet we also have a somewhat open market in which a lot of people choose not to buy health insurance. Why is that?

Finkelstein, Hendren and Shepard have new research on that. This is a working paper, but given the lead author and topic, I expect it will come out in a top 5 peer reviewed journal in the next year or so.*

People who don’t buy health insurance often make quite clear that they feel it is not a good way to spend their money. Finkelstein et al. don’t look at that. Instead they estimate what people are willing to pay from the choices they make. The result is startling: willingness-to-pay (WTP) is about a quarter of expected health care costs. This is not saying people can’t afford health insurance. Instead, it’s saying that they won’t pay for it even it’s a breakeven proposition for them.

Further, they estimate that even if you subsidize 90% of people’s healthcare costs, 20% of them still would not pay the remaining bit out-of-pocket.

Note that paying large subsidies, but requiring some contribution from the recipient,is a key part of Medicare Part D (prescription drug coverage for seniors), the Obamacare exchanges, and CHIP enrollment (in some states).

They also find that adverse selection is not a big driver of this behavior. Adverse selection is the Republican bugbear that people will not buy insurance because they aren’t sick, but will change their minds when they do become sick. Yes, it happens, but it isn’t a big contributor to unwillingness to pay.

So what is? Uncompensated care: that’s when the patient gets the healthcare first and the provider is never (fully) compensated afterwards. In short, people like free stuff.

Of course, it could be that people don’t have the money (that they are liquidity constrained). But if this were the case we’d see both adverse selection, and a tilt towards buying the cheapest possible plan. But that’s not what people do. When the poor do buy health insurance, they often buy the more expensive option.

There could also be a problem with inertia, inattention, or lack of information. They looked at this too. But new purchases of health insurance behave in precisely the same ways as people won don’t buy insurance. Yet they must have overcome inertia (they changed their choice, inattention (they made a choice), or lack of information (which is available freely to people who are interested in making a choice).

So, the authors are back to people like free stuff.

Yes, there’s also moral hazard (you make less healthy choices once you have insurance, to the tune of about a 25% increase in costs). But that would explain only a fraction of the small WTP.

This is where things get nasty. The scale of uncompensated care is large enough to explain the difference between WTP and costs of insurance. Uncompensated care takes two forms, direct and indirect. Direct care that is uncompensated is what most people view as charity, basically, the free clinic, the county hospital, or a religious organization that provides care. Indirect care is both filing bankruptcy to escape your bills, or just not paying them and waiting for the creditors to give up. Can you imagine the sh**storm if politicians proposed getting rid of those so that poor people would accept their Obamacare subsidies?

But this raises a new policy question. Direct costs of uncompensated care are borne by the whole society, and costs indirect care are borne by significant fractions of society, but in both cases the rich provide most of the funds through taxes or charitable contributions. So is there a better way to connect the sources of funds with the recipients by cutting out the intermediaries? The evidence from the earned income tax credit is that just giving money to the poor and trusting that they’ll make decent choices is awfully efficient at improving welfare.

Again, the public perception of such a policy would be a big problem. Can you imagine: oh, hey, you’re poor, here’s $20K, go buy some health insurance? An awful lot of good choices with that sort of windfall would be cancelled by one bad story on the local news at 6.

So, what are we left with? Progressive style ideas that can get enough support from the middle, like Obamacare requirements with subsidies. Or conservative style ideas like rely on our existing network of charity, free stuff, and high legal costs, cross-subsidized through taxes and charity. Or European style ideas of not posting prices or requiring much payment from anyone at all, and hoping you can cover the expenses on the back end.

Lastly, none of those is helped by people who expound the viewpoint that healthcare is a right. That sounds quite nice, but keep in mind that freedom of speech isn’t something you’re expected to pay for at the local free speech clinic. Healthcare is a valuable service, and it would be nice if the people who benefitted from it were the ones who paid for it. But they don’t wanna’.

To me though, this really means that all the details in Obamacare and Trumpcare are secondary. What a country’s political system needs to figure out is where to draw the borderling between two separate but unequal healthcare systems: one in which people pay essentially nothing, and one in which people pay something extra but expect to get more in return. Obamacare was never really about that borderline, but rather about how we run the former system. So maybe we should have worried about it less.

* I would advise against the mistake of viewing these authors are Republican/conservative hacks. Finkelstein is one of the best economists out there: she was a Marshall scholar (like a Rhodes scholar, but that requires brains and athletics), she’s a full professor at MIT (a top 5 school for decades), and a winner of the John Bates Clark Medal (given to the best economist under 40). And, of course, Boston is not exactly a Republican/conservative stronghold. Oh, and she did her dissertation under Jonathan Gruber, who was one of the main economists that designed Obamacare.

UPDATE: I had the additional thought that one could view these results as supportive of the typical pro-government interpretation. This is that if the government is going to engage in programs that are charitable, for practical purposes they need to eliminate the competition from the private sector to promote uptake.

OK. Now They’ve Started Something

With respect to the last post, the Republican House has now passed an update to Obamacare.

And America is unhinged about it.

First off, it’s not a law yet, and it’s not clear it will be.

Second, it’s not a repeal.

If that word is on your lips, you should probably just bite your tongue until the feeling passes. It isn’t a repeal. The thing is, that word is on everyone’s tongue. Unfortunately, like most of the work in Washington, this bill attempts to fix a Frankenstein monster by excising some parts, stapling on some other parts, and coloring over the whole thing with Sharpies. Here’s a summary.

Third, it keeps some of the bad parts.

Get the message: Republicans like helping people with pre-existing conditions, it’s just that Democrats love helping them. Politically, this is a no-brainer for both parties. The thing is, everyone has the good sense to not put up with nonsense like this in other areas of life. Both parties need our help on this one to develop some fortitude (more on this several paragraphs down).

A huge problem with this is the perception, sold through anecdotes, that this is a common problem. It isn’t. Most of what gets labeled as a pre-existing condition issue is just people who won’t/can’t pay their bills. That’s unfortunate, but it is different, and it requires a different solution. The actual proportion of pre-existing-condition-health-insurance-conflicts is about 1 out of every 3,000 people. That is a small problem to address: would you sacrifice 1/3000 of your healthcare to help these people? Of course you would. Who wouldn’t? This could be covered with $10-20 a year from every person insured through their employer. That is chump change comparable to the taxes and fees that anger people on their phone bills. OOH OOH … wait for it … and you already pay something like this with your auto insurance. So it can be done. It isn’t done because when we start substituting feeling for thinking, politicians see opportunities to spend other peoples’ money. We now have a huge bureaucratic edifice built around the public perception that uninsured sick people are a huge problem, while we have zero bureaucratic edifice built around the fact that some drivers on the road are uninsured and the disturbing corollary that they’re not the best drivers. Politicians of all stripes view the solution to the uninsured motorist problem as something they do not want to repeat with healthcare.

A far smaller negative is the continuation of the right to continue to have your kids covered by your family’s health insurance plan through the age of 26. Macroeconomically this is a requirement that everyone’s paycheck be smaller so that some generally healthy people stay covered. It sounds nice, and it is nice. But follow the money: who is helped by allowing parents to continue to have higher premiums withdrawn from their paychecks that really don’t get spent covering people who use the least healthcare? In short, it’s a backdoor transfer to heavier healthcare consumers. It’s weird, and it’s dodgy, and we should know better.

Fourth, here’s the more cosmetic updates.

• Firms are freed up at the low end: they no longer have to offer health insurance.
• Firms are also freed up at the top end: a tax on high end health benefits has been pushed off ten years into the future.

The above two sound problematic, and they may well prove to be. But be clear-headed about this: it’s a move back to the system that we had from the 1940’s through 2010. For firms, it’s still cheaper to pay employees with healthcare than it is to pay them with cash.

The primary issues with that are not whether or not they want to (Tom Perez notwithstanding). The primary issues are if they can afford to pay their employees at all (you know … staying open, no layoffs, stable hours), and how much latitude they have to deal with your compensation if your productivity doesn’t keep up with the healthcare they promised to pay you with (you know … stay under 50 employees, and keep people under 30 hours).

• Keep your eye on the ball: Obamacare was not really about improving coverage so much as improving the chances that provided services were actually paid for. The new bill pushes more billing back in the direction of consumers (which is a good thing), except that consumers have a poor history of consuming their healthcare first, then maybe sorta’ paying for it later. And yes, the cost is part of that.
• That last one means hospitals are going to be hurt (doctors’ offices have an easier time of avoiding people who are unlikely to pay).
• A corollary to those last two is that Medicaid will shrink a bit. For all the talk about Obamacare improving coverage, on the ground that mostly amounted to pushing people into Medicaid who probably could’ve gotten Medicaid before but were (maybe) too dysfunctional to follow through on that. The problem with this is that Medicaid itself sucks: it does not pay its bills completely or in a timely fashion. All of those stories you hear about doctors not accepting new Medicaid patients, or regions having no Medicaid providers, lead right back to Congress making promises they don’t keep. One wonders how people like Bernie Sanders can even praise Medicaid without breaking out laughing: are they doing it on a dare or something?
• Obamacare’s main source of bleeding is health insurers fleeing the exchanges. Democrats didn’t address this when they had a chance, and Republicans didn’t do anything about it either. I think there’s a big disconnect here between whether these things should or can be fixed. Republicans don’t think they can be, so they’re not trying. Democrats take the view that they should be fixed, but don’t seem to like to address whether they can be fixed at all. That’s not a policy, it’s a wish. The fact that they didn’t fix the exchanges when they had a chance makes me think they knew it wasn’t worth the effort, but didn’t want to take the blame.
• Individuals without employer provided health insurance will face less penalties if they don’t self-insure. That’s what they want as individuals, but it isn’t very good for the system as a whole. The Democrats approach with Obamacare was to push people to buy something they didn’t really want. The Republicans have moved in the direction of pushing less, but encouraging more and cheaper choices. Yes, those could be worse. But in every aspect of life, we seem to like the riding-the-plane-in-coach model better, so why should healthcare be any different?
• The whole debate about pre-existing conditions seems divorced from reality. No one would put up with this nonsense with auto insurance: for one reason or another you are not insured, you didn’t get insured, then you had an accident, and now you want to buy insurance that you didn’t buy just a few minutes ago? With cars, we would label someone who behaved that way as a jerk. And talking about the cost of the insurance is a dodge. The fact is that the accident changed your preference for what you want to spend your money on. But anyway, the Republicans didn’t change Obamacare’s requirement that insurers put up with this crap. What they did do is relax, somewhat, the extra that insurers can charge you for changing your mind. Oh … and they recognized that this is problematic and threw a ton of money out there to help people adjust to this, a move Democrats never considered. How much? Between a third and half of the cost of “The Wall”. Sounds like serious money to me.
• The Obamacare approach to getting the folks from the last two points to buy insurance was to threaten them with a small stick (the modest tax penalty that was rarely enforced). The Republican approach is to give them a carrot with tax credits.
• The Republicans aren’t going to cut people who are currently in Medicaid. But they’re going to keep new people from joining for coverage reasons. That’s probably a good thing, since the political will to make sure Medicaid pays its bills is just not there. But, they merely promised to fix that. Don’t hold out much hope for that. Democrats didn’t fix it either, but I wouldn’t hold that against them. I would point fingers at them for viewing one of the few things we know is not working as the thing that was going to make Obamacare work at all. When Democrats say that Republicans are mean, I think they have a lot to answer for on this one.
• The Republican plan will make old people cough up more money. This is a good thing: they are the richest group in the country, and they consume the most of what they’re going to pay more for. The problem is that they vote. Republicans will get killed on this if they don’t watch out. But they’ve made a big bet on the future by tilting reform towards the young. Democrats are still pissed that Reagan got so many young people on his side.
• States are going to be funding a bigger proportion of healthcare for their residents. But they will get greater flexibility in how to do so. This is a big slam on the grayer populations of the northeast and midwest. But, Republicans are running most of the country at the state and local level, and they want out of the top-down Washington model of how to run their states.

Oh, and Republicans are keeping a good piece of Obamacare: the general trend away from paying for services to paying for outcomes has not been touched. If Obamacare changed the terms of that debate, it is an unalloyed good thing.

**************************************************

Keep your eye on the ball, folks.

If you need healthcare, on average you’re better off getting it in the U.S. than anywhere else. If that doesn’t change, we’re still on the right path.

But, you get what you pay for: Obamacare is a Cadillac, and Trumpcare is a Lincoln. The similarities are bigger than the differences.

That’s OK too. Top to bottom, we’re the richest country in the world with the highest level of consumption on .. just about everything.

It is a big problem that healthcare is unevenly affordble. Do not mistake uneven affordability with uneven availability: the healthcare that people receive is far more equally distributed than the bills for it are. That’s a good thing. Maybe we can do better. But don’t break availability to fix affordability: this is why you can’t find an obstetrician in Las Vegas if you’re on Medicaid. You should be suspicious that one of the words in the formal title of the act that passed Obamacare is “afforable”.

It’s weird that half the country gets its health insurance through employers. This is a historical relic of World War II that should go away. Let it. Currently, the party that wants to do things (a little) differently is the Republicans. They were not this way before Pelosi, Reid, and Obama. The Democrats are not this way now; when they get their chance it will be nice if they are.

I was watching Bill Maher’s show the other night. He considers himself to be a solid Democrat/Progressive/Liberal. He stated his conception of healthcare provision quite clearly. What he described was a social security system for healthcare. I think a lot of people take that view (and I’m OK with it too). Fair enough. That is not what we have now. Some people do not favor a move towards a social security system for healthcare because we’ve screwed up our social security system for retirement. Again, fair enough. The economics are that social security systems are feasible, practical, and affordable. It’s the politics that goofs them up: people vote themselves out of the paying group and into the receiving group. If you don’t solve that problem first, your social security system for healthcare won’t work. Promise.

Senator Elizabeth Warren was on the same show. She’s presented healthcare as a uniquely American problem. It isn’t. Different countries just paper over the issues differently. Her entire set of positions lacks credibility once you recognize that. She’s a Democrat but there are people on both sides of the aisle that should be tuned out on that basis alone.

Macroeconomically, all countries suffer from the same problem. Data shows that every consumer treats healthcare as a luxury. Denying that is not helpful. This means they spend more on it as they get richer. So economic growth means a greater proportion of an economy devoted to healthcare. Except data shows that healthcare is not a dynamic, productive sector. That’s a problem. But there’s a really obvious implication: don’t bind it up even tighter (with regulatory and bureaucratic systems).

Once again, politicians have completely avoided the one simple way to make healthcare cheaper: shift supply to the right. That’s economist lingo for educate more doctors, nurses, and so on. It seems like everyone wants to go into healthcare because those are “good jobs”. If one industry/sector has “gooder” jobs, that imbalance isn’t sustainable. Unless, of course, the political system is preventing that. Get the message: Republicans and Democrats are prejudiced against all the people who don’t have an MD or RN after their names.

But, of course, doctors and nurses say that their pay isn’t enough to compensate them for all the hassles. Don’t make it harder for them. Again, D.C. seems to have real problems with this. Start by turning Medicaid into a program that pays its bills.

I’ve Been Biting My Tongue All Semester

The class has gone through the first semester under President Trump (the legacy media, with their attraction to creating milestones where there are none, is noting it as the first 100 days).

So why didn’t we cover Trump much at all this semester?

Honestly, because I had a suspicion that seemed too unusual to voice openly. Macroeconomically, I thought all the bluster (from both sides) would turn out to be just one big nothingburger.

And I think I was right …

• Repeal Obamacare? Yeah, right.
• Reform Obamacare? Nope.
• Tax reform? Just getting that onto the table.
• A wall? As a construction project this was never going to happen overnight anyway.
• Trade wars? Any decent economist knows that trade is between people and firms, not countries.
• Gorsuch or Garland? For better or worse, this is something. But it’s not macroeconomics.

I could go on.

The Democrats are ungrounded, unmoored, and unhinged in various proportions.

The Republicans need to go back to high school English classes and learn the importance of a dramatic foil for understanding how the story unfolds … and that they are not in high school English any more.

The Trump administration needs to get someone on its side. It isn’t that they have too many chiefs (although they may). It’s that they don’t have enough Indians. Heck, they don’t seem to have any Indians at all.†

And everyone thinking about fiscal policy needs to revisit the word ossify. Here, let me us a variation in a sentence. Governments of developed countries are so ossified that it isn’t much use paying attention to fiscal policy.

† Excuse the political incorrectness — whose apocryphal source described a genuine decision-making problem for 19th century Native Americans.