Tag Archives: economics

Toward An Affordable Health Insurance Industry

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John Cochran, University of Chicago Booth School of Business Professor of Finance, among other positions, is on the right track, but he’s wide of the mark in some critical respects.

The unraveling of the Affordable Care Act presents a historic opportunity for change.  Its proponents call it “settled law,” but as Prohibition taught us, not even a constitutional amendment is settled law—if it is dysfunctional enough, and if Americans can see a clear alternative.

And

Only deregulation can unleash competition.  And only disruptive competition, where new businesses drive out old ones, will bring efficiency, lower costs, and innovation.

That’s plainly true, and he goes on to tout further—correctly IMNSHO—the advantages of a free market in the delivery of health insurance and the delivery of health care services.  However, he has some misconceptions in the extent to which those two industries should be allowed to go in a free market.

Health insurance should be…lifelong and guaranteed-renewable, meaning you have the right to continue with no unexpected increase in premiums if you get sick.

This isn’t insurance: it eliminates the concept of premiums being based on the risk being transferred.  Or, it is insurance, and the risk being transferred and the fee charged for accepting that transfer (the premium) will be elevated to account for the higher risk involved in that mandated longer-term risk acceptance as well as the changed risk factor represented by having gotten sick.  And sick again with the same thing.  And again.

Insurance should protect wealth against large, unforeseen, necessary expenses, rather than be a wildly inefficient payment plan for routine expenses.

This is blatantly normative and not at all related to the competition of free markets.  There will, indeed, be customers who want policies that cover “routine expenses;” it’s not Cochran’s—or government’s—place to proscribe these because they disagree that such policies have utility.

Rather than a mandate for employer-based groups, we should transition to fully individual-based health insurance.

Again, no.  This is another interference with a competitive free market.  It’s certainly true that the (tax-policy encouraged) “mandate” for employer-based groups is a distortion of the market.  However, rather than simply distorting the market in a different direction, let that market—the individuals who aggregate into that market—decide whether group plans are viable.

Aside from that, there is the matter of preexisting conditions.  The only risk that can be transferred here is the timing of the next flare up of the condition.  Forcing folks with these conditions onto the individual market will simply artificially elevate the premiums they’ll have to pay for the transfer of that risk.  Group plans would allow the risk acceptors, those insurance companies, to spread the timing across a risk pool larger than one, which would allow them to charge a lower premium—with a truly free, competitive market forcing them to compete for the business, and so exerting further downward pressure on the premiums charged.

Current group plans can convert to individual plans, at once or as people leave.  Since all members in a group convert, there is no adverse selection of sicker people.

This isn’t a free market—it’s a mandate to move away from a policy structure that many will want to retain, even if the coverages available within a particular group might change under free market imperative.  The free market also will handle the question of adverse selection just fine—that pricing matter.

The Fed Tapers

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…and the stock market shoots up.  QE was supposed to be propping up the market, driving it even; heretofore, whenever the Fed mumbled that it was maybe thinking about beginning to taper sometime in the vague future, the market tanked.  What’s up with the hard increase?  John Malkin at AEI suggested three reasons for that.

These reasons center on the fact that the Fed is continuing its monetary easing through other channels (the Fed Funds rate and a lowered unemployment rate threshold); the now fact of tapering reduces uncertainty about the Fed’s actions; and the fact that the Fed actually has been buying $94 billion in bonds monthly this year (not the advertised $85 billion), and no one noticed the drop—the $19 billion reduction was perceived as the advertised $10 billion, so the taper size seems to be no big deal.

To those, I’d like to add a fourth reason, and a warning.  The reason is this: the fact that the Fed actually has begun easing is taken as its advertised criteria for doing so having been met and will continue to be met in the nearby future.  This perceived confidence in the economy’s recovery by the Fed is viewed favorably by the market.

The warning is this.  Malkin opened his article by tacitly pooh-poohing a QE-induced market bubble.  Comparing market performance with actual economic performance, it seems clear to me that a bubble was generated.  Comparing the current market to the current underlying economy, it seems equally clear that the bubble is merely extending in that perception-based optimism.

In the end, the economy will catch up with the market.  Or the market will fall back to the economy.  Heads up.

Why Is Delta Afraid?

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Indeed.  Or, it’s just an abuse of market power?

Paulding County, GA, has an airport, Silver Comet Field, and Paulding wants to have a small air line operate all of four or five flights per day out of it.  Hartsfield-Jackson International Airport is 40 miles away, has five runways, 203 gates, and a 46 million passenger-per-year throughput.  Delta Airlines, which uses Hartsfield for its hub, is feeling so threatened by this dinky little airport that it’s doing everything it can to stifle Paulding’s “competition.”

Holden Shannon, a “senior executive” for Delta put an op-ed into the Atlanta Journal-Constitution worrying, with no irony, that

a second airport can quickly expand, and the impact on Hartsfield-Jackson would be significant.

This, though, is sort of the nature of free competition.  Is this what Delta fears?

Shannon also said competition from Paulding would “threaten Atlanta’s economy.”  But the only form the competition would take would be from price competition, making consumers better off.  Is Delta really so fragile that one more, dinky, entrant into the market will push it over the edge?  Is Delta that badly run?  Is that what Delta fears?

He also complained to the Paulding County Commission Chairman, bellyaching that Silver Comet Field’s plans supposedly were hatched in secrecy.  But he chose not to explain why a business is obligated to form its plans in full view of its competitors.

Shannon isn’t the only Delta executive with his knickers bunched, either.  Richard Anderson, Delta’s CEO, told the AJC that the planned commercial operation would be “an economic and community failure.”  Never mind that that’s not Anderson’s call—that’s for the market and the community to decide.  Is this what Delta fears—that the market will decide in favor of competition?

Hmm….

Some Thoughts on the Ryan-Murray Budget Deal

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Americans for Prosperity President Tim Phillips has this one:

This budget compromise is not just bad policy, it is bad politics.  The American people remember hard-won bipartisan spending limits set by the sequester, and are not pleased to see their conservative representatives so easily go back on their word to rein in government over-spending.

The deal does, after all, increase spending to a skosh over $1 trillion (just about halfway to the Democrats’ spending call of $1.058 trillion from the current spending of $0.967 trillion), while increasing, slightly, defense spending (rather than the more draconian cut the sequester had scheduled for 2014) and increasing, slightly, discretionary spending—all paid for with spending cuts and fees elsewhere, with chump change left over for a net deficit reduction.  Yes, yes, this is a current increase in spending paid for with future cuts and fees.  See below.

American Conservative Union Chairman Al Cardenas has one, too:

The solution is not to walk away from progress and add over $60 billion in spending over the next two years.  We are not impressed by the cost cutting gimmicks and urge members of Congress to tell the budget conference to get back to work[.]

What’s your plan, guys on which the conference committee should “get back to work?”  With what votes, particularly in the Senate, do you claim your alternative (you do have something more intelligent than just “No,” yes?) can pass?

Certainly, there’s much to dislike in this compromise, but it’s good enough for the next year (albeit it covers the next two).  More importantly, blocking it is tactically stupid: it moves the focus in an election year to Republican intransigence, whether that’s a fair perception or not.

I have one, also.  Take the deal, lose the distraction.  Keep the election year focus on the failed Obamacare, on the anti-business Dodd-Frank, on the Democrats’ tax and spend demands, on the Democrats’ blowup of the Senate (picking any two (so long as one is Obamacare) in order to have that focus).  Win elections, then do the budgets that are necessary, repeal Obamacare (you do have a replacement plan ready to proffer, yes?), eliminate the CFPB, and so on with the votes to do so actually present in the House and in the Senate.

Quit being chuckleheads.  Quit being the Party of Stupid.

Last Week’s Jobs Report

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The headline is that the jobless rate fell in November to 7.0% from October’s 7.3%, and the participation in the labor force (the number of Americans working at some capacity or looking for work) rose in November to 155,294,000 from October’s 154,839,000.

However, the headline ignores the fact that the Democrats’ government shutdown for much of October led to a large number of Federal employees being furloughed (some 450,000 were out of work for the duration), which both contributed to October’s rise in unemployment and that lowered number in labor force participation.  Comparing November’s data with September’s, the month immediately preceding that shutdown, provides a much more useful comparison.  In September, the unemployment number was 7.2%; the November still seems a significant drop.  However, September’s labor force participation was 155,559,000 Americans: that force had shrunk by 265 thousand Americans by the end of November.  The lower participation contributed significantly to the headline unemployment rate “drop.”