A Lesson in Marginal Utility

We're finally replacing our current basic cable with Verizon FIOS (with DVR) on Tuesday! The channel lineup is outstanding and diverse, so kudos to Verizon for catering to its customers.

Having studied in Germany (Trier) back in 2003, I was happy to see that FIOS offers two German language channels: Deutsche Welle and ProSiebenSat 1 Welt. It would be good to refresh those language skills after six years of disuse.

But not so good that I'd pay $14.99 per month. I'd probably be willing to pay about a third of that. Especially since I can get a lot of content online through Netflix and otherwise.

On Health Bill, Lone GOP Supporter Got Played

One of the most surprising aspects of last night's House vote on the Democrats' plan to deepen the distortions in the health care sector was the lone Republican vote for it.



That vote came from none other than first-term Rep. Anh "Joseph" Cao (R-LA-02). He got played. The Democrats--including personal entreaties by the President--secured his vote by promising him lots of goodies to take home to his constituents.



He doubtless hopes it'll get him reelected. Remember, the first priority for the vast majority of elected officials is...to get reelected. And keeping the people who vote for you happy is the best way to do that.



But Louisiana's 2nd district has a Cook Partisan Voter Index Rating of D+25. That's a "safe seat" for Democrats. The only reason Cao won last year is that he was running against a deeply corrupt incumbent. He's a one-termer, plain and simple.



So why do I say he got played? Because his vote makes it marginally more likely for Democrats to be successful in the Senate without really affecting his likely defeat next year. One of the moderate Senate Democrats is Mary Landrieu of Louisiana, whose reelection victory margin last year was underwhelming in the Year of Obama.



Now, Landrieu is only one of several moderate Democrat holdouts in the Senate who may ultimately prevent comprehensive healthcare legislation this year--despite their supposed filibuster-proof majority--but the bipartisan patina Democrats will now be able to claim can only make their efforts easier.



Despite having been played, Cao is no fool. Rather, his vote last night is symptomatic of the corrosive power-at-any-cost mentality that plagues political life. Instead of gracefully accepting his brief stint in Congress, he has abandoned principle in the vain hope of prolonging his tenure.

Ramming a Climate Bill Through Senate Committee is Politically Risky

This morning the Senate Environment and Public Works Committee reported the Kerry-Boxer climate bill (S. 1733: "Clean Energy Jobs and American Power Act) in a rather unusual fashion. Committee Republicans were insisting on further economic analysis of the legislation--a courtesy they extended to Democrats several years ago during the ultimately unsuccessful Clean Skies debate--before moving to mark up the bill. Chairman Boxer refused to wait and forced the bill through the committee despite a GOP boycott of the markup.

The 12 committee Democrats voted 10-1-1 to report the bill: Baucus (D-MT) voted against it, and Carper (D-DE) didn't make it to the vote.
The following committee Democrats voted for it: Barbara Boxer (CA), Frank Lautenberg (NJ), Benjamin Cardin (MD), Bernie Sanders (VT), Amy Klobuchar (MN), Sheldon Whitehouse (RI), Tom Udall (NM), Jeff Merkley (OR), Kirsten Gillibrand (NY), and Arlen Specter (PA).

Without getting into the minimal benefits and large costs of the legislation, this vote appears to carry significant political risk for several committee members.

Baucus, Lautenberg, Merkley, and Udall aren't up for reelection until 2014, so this vote is unlikely to have much significance by then. The same is probably true for the 2012 class--Cardin, Klobuchar, Sanders, and Whitehouse--except in the (hopefully) unlikely event that the economy fails to recover by then.

For those up in 2010, however, facing the very real possibility that recovery will be slow and unemployment remain high for the next year, this vote is a bit of a gamble: whether the base energizing effects on turnout will outweigh the loss of swing voters, most of whom quite reasonably are more concerned about employment at the moment.

And then there's the inconvenient truth that global surface temperatures have been stable for the last decade and this year has been rather cold in the United States. Note that I'm making no claim regarding the future of global temperatures, simply laying out the factors that will affect voter perceptions at the polls next fall.

CQ Politics Race Ratings for 2010 Senate Races considers Boxer's California seat to be "safe", Gillbrand's New York seat as "Likely Democrat", and Specter's in Pennsylvania as "Leans Democrat." Yet polling on Real Clear Politics has Specter slightly behind fmr. Rep. Pat Toomey, and that's before his primary with Rep. Joe Sestak (and a former admiral), which is likely to force Specter further to the left.

In New York, Gillibrand could plausibly be defeated by either former Governor George Pataki or former NYC mayor Rudy Giuliani. Neither has officially entered the race.

Boxer seems to be in the best shape of the three, although her advantage over presumed GOP challenger and former HP CEO Carly Fiorina has narrowed significantly in recent months.

Of couse, a year in politics is a very long time, and a lot could happen between now and then. Nonetheless, when reelection or early retirement can depend on a few points, a vote on a bill that many voters rightly perceive to damage American competitiveness and productivity is highly unlikely to improve these senators' prospects.

And to have the vote within 48 hours of major Republican victories in New Jersey and Virginia seems bizarre. Then again, maybe the writing on the wall says if they don't get it done now, they never will.

Germany's Fusionist Election

Even as America's political class expands its dominance over the U.S. economy, German voters sent the opposite signal to Berlin in today's parliamentary elections.

Since Germany has proportional voting, the Bundestag has representation from five different parties. At the risk of major oversimplification, the major parties are roughly equivalent to the Republicans (Christian Democrats), Democrats (Social Democrats), Greens, Libertarians (Free Democrats, aka "Die Liberalen"), and Socialists. Of course, the latter three parties, though technically minor parties compared to the first two, bear little resemblance to their American brethren. Simply put, U.S. third parties have no prospect of attaining political power, so they radicalize much more than those in Germany and other proportional representation systems.

In any case, this election marks the end of the 'grand coaltion' of Social Democrats and Christian Democrats--a tenuous and relatively non-reformist coalition. The coming Christian Democrat and Liberal Democrat coalition is essentially a fusionist (in the Frank Meyer sense) coalition of conservatives and libertarians.

It's too soon to tell what policies they'll pursue, but tax relief and improving the business climate have been major parts of their platforms. This means casting off those regulations that are harmful, cutting spending, cutting taxes, and otherwise reducing the burden of government.

One hopes that they've learned from the Republicans that tax cuts without spending cuts doesn't really cut taxes, it just shifts that burden to the future. (Yes, my supply-side friends, I know that the dynamic effects of tax cuts can make up for part of the revenue loss, but rare is the tax cut that fully pays for itself.) Fortunately for Merkel and company, Germany's flabby welfare state offers plenty of fat to cut out.

Zum Wohl and viel Gluck!

Health IT from the Bottom Up

Today I attended the event "Explaining International Health IT Leadership" at The Information Technology and Innovation Foundation to release an ITIF report by the same name. In addition to the ITIF scholar who authored the report, the panel included experts from the small, relatively homogenous nation-states of Finland and Denmark.

The panel discussion focused on government initiatives to spur development of electronic medical records, telemedicine, and other innovations that Information Age consumers expect in many other sectors of the economy. One got the impression that the primary impediment to broad penetration of these technological advances is a lack of political leadership.

But if health care consumers want these things, why doesn't the market provide them? Well, to a certain extent, it does, but probably not as much as people want.

The vast majority of private sector health plans are purchased through an employer. This has at least two effects with respect to health IT.

First, employment decisions are generally made based on total compensation, which includes wages, benefits (medical and otherwise), and intangibles like opportunities for advancement, prestige, enjoyability of work, and so forth. This bundling prevents workers from exploring alternatives and selecting something that fits them best, as we do when we choose universities, automobiles, and homes. Instead, employee demands on health care providers are mediated by insurance companies AND employers, neither of whom can efficiently communicate the individual preferences of workers. As a result, neither the insurance market nor the providers face sufficient competition to drive the rapid innovation seen in other sectors.

Second, the linkage of employment to health insurance means that insurance coverage is very likely to change every time a worker changes employment. Electronic medical records may be a worthwhile investment when long-term relationships exist, and perhaps less so in a market with contractual instability.

Medical records also raise concerns about privacy. What is the appropriate level of privacy protection? No 'correct' answer exists--demand for privacy varies subjectively with individuals. Any one-size-fits-all standard will in fact not fit all, but will leave many people unhappy--both those who want more privacy and those who are willing to trade off some privacy for other benefits (like individually tailored advertisements).

Concerns are also raised about interoperability and standards. This is an important point, but one that markets have resolved time and time again--railroad track gauges and PC operating systems, just to name a few. Far better to encourage experimentation that gets us to the medical records equivalent of modern operating systems instead of locking us into something like Windows 3.1--once state-of-the-art, now completely obsolete.

Giving individuals more control over their health care dollars ought to force insurance companies and medical providers to innovate and offer these products and invent others simply to attract and retain customers. It's not at all clear that government leadership is the only way to get there.

Where are the Real Health Care Reforms?

For all of the rhetoric about reforming health care in the United States, Senator Baucus' proposal—like the other Democrat bills—is striking in how little reform it incorporates, at least in the right direction.

The root cause of many problems facing American health care today is the reliance on third party payment for medical expenses. Currently the government pays for about half of U.S. medical expenses. Roughly forty percent is paid by employers and insurance companies. Only about ten percent comes directly from health care consumers.

At the time of care, patients on average bear only about a tenth of the cost directly—the rest of the episode's cost comes from others: the insurance company to which the patient pays premiums or the government. Spending other people's money on oneself does not diminish a patient's concerns about quality, but incentives to be cost-conscious are weak. The result is excessive consumption of marginally useful or even potentially harmful procedures.

While risk sharing is an appropriate strategy for unexpected and potentially catastrophic care episodes, such insulation from having to confront the costs and benefits of alternative options systematically biases patients towards accepting more expensive and risky procedures with little or no net benefit than they otherwise would.

Would the Democrats' proposals help to properly realign the incentives facing consumers? No, they would make the problem worse.

Compelling all Americans to purchase insurance either through an employer or individual mandate—especially when combined with guaranteed issue, community rating, and minimum benefit requirements—would further entrench this overconsumption cost death spiral, as would more explicit government takeovers such as single-payer, government insurance, and co-ops. And since medical services would no longer be rationed by price, they would ultimately have to be rationed by quality degradations like long waiting times and denial of care.

When politicians and bureaucrats direct the allocation of resources, they are spending other people's money on other people, which gives them insufficient reason to monitor quality or cost as carefully as private actors spending their own money.

Another approach would empower consumers to make their health care decisions with full knowledge of the relevant costs and benefits. They would be free to choose the kind of plan that best fits their preferences, whether that would take the form of fee-for-service, prepayment (the health maintenance organization model), or catastrophic insurance with out-of-pocket payment for routine and expected care. After all, ‘government funds’ come from taxes, and ‘employer contributions’ mostly come out of employee compensation, so why not just let individual consumers control the money that funds their medical needs?

Two major (and many minor) obstacles prevent this consumer-driven market from becoming a reality: the preferential tax treatment of employer-provided health insurance purchases and poorly designed government programs.

Since employers can deduct health benefits from their taxable income but individuals cannot, workers are pushed into accepting whatever plan their employer happens to offer. Giving individually purchased health coverage the same tax treatment as employers receive would allow workers who prefer a different type of plan to cash out the portion of their compensation that employers currently divert into the so-called employer contribution to their workers’ health care. Policymakers have several options: tax credits, tax deductions, or, even better, large HSAs.

Government programs fail to give their beneficiaries ownership of the funds that finance their care. Giving Medicare recipients the option to choose a health-status-adjusted voucher and allowing states more flexibility in serving needy populations would further develop an individual insurance market.

Removing barriers to interstate competition in health insurance could also spur lower costs, more innovation, and more regulatory competition between the states.

Unfortunately none of the Democrats' proposals would empower health care consumers in these ways or much otherwise. They would instead consolidate the status quo of third-party payment for routine expenses and further concentrate the power of the political class.

Palin Case Highlights Need for Tort Reform

Today's Washington Post has a very fair article about Sarah Palin's resignation from Alaska's office of governor. For the most part, she was sick of the attacks on her and her children. What a shocker: a decent, small-town person gets thrown into the national political spotlight and recoils at the viciousness of the modern political arena.

What jumped out at me though, is that her new-found fame or notoriety (depending on your perspective) has attracted a series of lawsuits that have put her family $500,000 in debt. I can't speculate on the merits of those lawsuits, unfamiliar as I am with the details, but suppose they're all frivolous and the Palins are exonerated in every case. They win, but they're still out hundreds of thousands of dollars in legal fees. Is that justice?

The need for tort reform couldn't be clearer. The answer is for states to switch to a loser-pays rule, where the victor has no liability for his/her legal fees (and the federal government should stay out of it). Alaska has taken steps in this direction. Virtually every other developed nation has rightly adopted this rule. It would discourage frivolous lawsuits, while ensuring that injured parties can still obtain justice.

Some--like the trial lawyers associations--will claim that this would prevent legitimate cases from being undertaken. Not so. Where loser-pays exists, a competitive market for tort insurance is available at premiums that depend on the potential size of the payout and the probability of success. Most of the time, the law firm--not the plaintiff--will cover the premium.

It doesn't make sense to clog the courts with cases that lack merit or to subject innocent parties to ruinous legal fees because someone doesn't like their politics. If the Palins are found to be liable in one or more cases, they should justly pay. But if they are found to have no culpability, for them to be saddled with debt from legal fees will be a miscarriage of justice.