Friday, July 12, 2019

Economic Theory in the White House: The Rebate Rule

The "rebate rule" was proposed by the Dept. of Health and Human Services (HHS) in February 2019.  It would have prohibited rebates in the Medicare Part D prescription drug market.  Chicago Price Theory was intensively used in the White House to project the effects of the rule on market outcomes and the distribution of surplus between senior citizens, taxpayers, and firms at various positions in the supply chain.

HHS described rebates as follows "Prescription drug manufacturers prospectively set the list price ... of the drugs they sell to wholesalers and other large purchasers. Manufacturers also retrospectively pay PBMs or other entities in the drug supply chain, under rebate arrangements, that meet certain volume-based or market-share criteria." (84 FR 2340)  The Part D rebates alone exceed $30 billion per year and this rule by itself was projected to increase the Federal deficit by about $20 billion per year, which is historic as a single regulation.

This proposal to eliminate rebates was obviously controversial, as reported in the news and evidenced by the facts that the rule was proposed, received almost 26,000 comments from the public, and then this Thursday was withdrawn by HHS.  The proposed rule was complicated because it was a vertical (business-to-business) price control in a market that already has nonlinear pricing, nonlinear and interdependent government subsidies, and longstanding price regulations of various kinds.  The President himself described the rule as requiring a 193 IQ in order to understand its effects:
But prescription drugs, look, it's a rigged system, OK, if I told you how crazy it is, the Web, it's the Web, you need 193 I.Q. to even understand.  This web of geniuses, they put this thing to lower drug prices. It has 19 effects here and 27, so we got it down and we're getting it down further. We have the smartest people, the best people in that world working on it.... (President Donald Trump April 27, 2019, Green Bay WI)

[other of the regulations discussed in that speech were analyzed with Chicago Price Theory too.  Several dozen parts of other CEA reports draw closely on specific pages of Chicago Price Theory].

I agree that it would be essentially impossible to understand the economic effects of this rule in a timely manner without the extensive assistance of Chicago Price Theory and Automated Economic Reasoning. An important tool for analyzing nonlinear pricing is affectionately known as "the Murphy football" among Chicago economics students (and I associate with this Klein and Murphy article about competition with nonlinear pricing; see Chapter 5 and Chapter 13 of the text).

The football picture shows, among other things, the distinction between list price and net price (i.e., list minus rebate), but in order to prevent revealing too much of the answer to one of the new book's homework problems, I show it in more abstract form below.

For the same reason, among others, I will not say what was CEA's projected impact of the rule.  But take Chicago Price Theory and perhaps you can join the "web of geniuses."

There is no other textbook that teaches the "Murphy football."

There is no other textbook that brings its students so immediately to rigorous and timely policy applications of economic theory.

Tuesday, July 9, 2019

"No One in Ohio Cares About Burma": The Washington Bubble

Less than 600 Federal employees are directly accountable to the voters.  Almost a half million Federal employees live in the DC metro area and are accountable to someone who lives in the DC metro area.  Naturally, Federal agencies are sensitive to media coverage, and journalists and think tanks covering Federal matters also disproportionately live in the DC metro area.

This results in groupthink, a.k.a., the Washington bubble.  Groupthink results in unnecessary errors, of which being surprised by the 2016 election is the most famous instance of a large sample.

Both General Kelly and Mick Mulvaney encouraged EOP staff and agency leadership to spend time outside the Washington bubble.  E.g., holding policy events outside the bubble, or even going to the site of a Presidential rally.  CEA’s high turnover helps too, although professors living near DC are disproportionately interested in taking a CEA position.

I went home to Illinois every other weekend and immediately noticed the contrast.  Here are three examples drawn from those trips.

The opioid epidemic.  Between 2009 and 2016, there were over 100,000 U.S. overdose deaths involving illicit opioids (especially illicit fentanyl).  I have been to funerals in Illinois where overdose was the cause of death.

Yet, in the Washington bubble, attention to this subject was low.  The CEA published 16 Economic Reports of the President during the Bush and Obama Administrations, and none of them mentioned opioids, overdoses, or heroin.  By comparison, the 2013 Economic Report of the President had a full chapter on climate change.  (That attention to the opioid epidemic changed beginning with President Trump's CEA).

I’ve read two memoirs from staffers in the Obama White House.  Rhodes’ memoir mentions climate change 21 times (Trump is mentioned 95 times) but never the opioid epidemic.  The 2016 meeting between Presidents Obama and Xi receives a lot of attention in the book because climate change was discussed, but no mention of the Chinese production and export of illicit fentanyl (fentanyl was a topic of the meeting, but apparently not important enough to explicitly appear on the White House fact sheet, which did mention space debris and protecting elephants). 

(A related film that also features Samantha Power and Susan Rice also has a lot of climate change and zero opioid epidemic).

Pfieffer’s memoir mentions climate change 9 times (Trump 303 times) but never the opioid epidemic.  (The "fact-checked" memoir does find space to declare that, with President Trump, we staff "wander[] the halls of the White House doing dumb, mean, s[]t"). 

To be a bit more systematic about this, I looked at google trends for “fentanyl” and “climate change” state by state over the past 5 years.  The results are well summarized by comparing Ohio and DC, both of which had age-adjusted overdose death rates of 39 people per 100,000 in the year 2016.  By this metric, Ohio's attention to fentanyl was more than triple DC's, as shown in the chart below.

Wage stagnation.  Last summer the bubble’s economic meme was that real wages had “stagnated”: that is, since 2016 (if not longer) worker’s wages had not advanced beyond inflation and that workers were suffering from “feeble bargaining power.”

Meanwhile back home I was seeing more striking workers than I can ever remember.  Is that what feeble bargaining power means?  Local friends and neighbors asked me “I read/heard about this ‘wage stagnation’ stuff – why aren’t I seeing it in my line of business?”

CEA had been working on a report about measuring wage growth, using the economic literature on how to do such things.  The report showed that wages were growing significantly more than inflation; the groupthink was wrong.  More surprising, some of the perpetrators of the groupthink acknowledged that they had suspected that real wages were growing but for some reason did not speak up about their understanding until CEA’s report was published.  (The charitable interpretation is that, living in the bubble, they viewed it as too risky to say what they knew until CEA offered more evidence as protection).

The cost of an American lifestyle in a Nordic country.  As part of its work on socialism, CEA looked at the costs of living an American lifestyle in a Nordic country.  Part of the American lifestyle is driving a vehicle.  Because the top three selling vehicles are pickup trucks (I see them all the time at home), our October socialism report looked at the cost of owning and operating a pickup truck in Nordic countries.

That was a mistake (entirely mine).  Although the President’s speeches (which rely on some of CEA’s socialism findings) are for the entire country, CEA reports are primarily read inside the Washington bubble where pickup trucks are objects of derision.  So the subsequent Economic Report of the President's socialism chapter deleted all references to pickup trucks and change the analysis to a Honda Civic.

Much of the public has an interest in bringing outsiders into elected Federal offices.  While an outsider can initiate important changes, he still has the challenge that much of the Federal manpower lives and works in the Washington bubble, if not originating from it.

Many among the UNELECTED in the Washington bubble are unaware of the gaps above, and at best dimly aware of any gap at all, between them and the rest of the nation.

Take Ben Rhodes (unelected), who had to be repeatedly reminded by (elected) President Obama that "no one cares about Burma in Ohio" (pp. 174, 390 of Rhodes' memoirs).  Mr. Rhodes absorbed the lesson well enough to italicize it in his book, and well enough to recall that candidate Obama himself ran against the DC bubble (p. 403), but not deeply enough to think about gaps such as those mentioned above (or the economic damage from Obamacare, historic regulatory overreach, etc.) that in principle his party could manage.  Even with a year of reflection, the best he can discern is that his party lost the White House and both houses of Congress primarily due to "racist, mean-spirited, truthless politics" (p. 401).

The best Dan Pfeiffer (p. 95) can discern is that technological change in journalism created an environment where a purportedly unqualified outsider could win a Presidential election.  Pfeiffer does perceive that the economy may be one issue among many (pp. 269-71), but only regarding economic messaging; there were no policy mistakes between 2009 and 2016 that caused significant and genuine harm to voters living outside the Washington bubble.

There is a London bubble too, with a large gap in perspectives between those living in the London metro area and those living elsewhere in Britain.  Sir Kim Darroch invited me, several White House staffers, and many others from DC to an April event at the British embassy with Phil Hammond as guest of honor.  I was shocked that the public remarks were so straightforward as to their continued disdain for UK and US voters' decisions, almost 3 years past.  I expected that Darroch and Hammond would have short political life spans but not so short that Darroch would enter political intensive care already today.

[My experience at the Irish embassy was entirely different (a smaller group with Finance minister Paschal Donohoe and Ambassador Daniel Mulhall).  Although preferring that UK remain (Ireland is part of the EU, so exit would put an EU-nonEU barrier on their island), these smart, thoughtful people understood why many British would want to Brexit.  Perhaps there is no "Dublin bubble"?]

Consider it good news for US political outsiders that the Washington bubble shows little sign of adjusting its outlook.

Monday, July 8, 2019

Marxist Provisions in "Medicare for All"

This post refers to four bills entitled “Medicare for All”: two introduced in the previous Congress (S.1804H.R.676) and two bills recently introduced in the current Congress (S.1129H.R.1384).  Although few people have actual read them, they are popular and enjoy enthusiastic support.  The bills’ titles give the impression that they are merely opening up the U.S. Medicare program to all ages.

The titles belie the actual text.  Closely following Marxist principles, the “Medicare for All” bills eliminate profits and private enterprise in health-related industries.  They centralize decisions about capital investment.  They give healthcare away “for free.”  These provisions are rarely undertaken by other countries and are contrary to media claims that actual Federal policy proposals have little to do with socialism or Marxism.

Prohibition of profits

The net operating surplus of a business is its revenue minus depreciation, labor costs, and materials costs.  The net operating surplus of an economy is the net operating surplus added across all of its businesses.  It can also be called profit, as long as capital or financing expenses are not subtracted.

According to Karl Marx, net operating surplus exists only because of the exploitation of workers by the capitalist class.[1]  Time preference and other “reasons” for a positive net return on capital are merely bourgeois justifications (i.e., flimsy excuses disseminated by capitalist-financed commentators) for labor exploitation.[2]

Zero net operating surplus is therefore necessary to eliminate exploitation by Marx’s definition.  The two House “Medicare for All” bills (hereafter, M4A) would prohibit health providers from earning profits.  As the new House bill puts it:

There is a moral imperative to correct the massive deficiencies in our current health system and to eliminate profit from the provision of health care.[3]

In contrast, neither profits nor net operating surplus are prohibited in the current Medicare system.

Government ownership of an entire industry’s businesses

Government ownership of the (nonlabor) means of production is one socialist proposal for eliminating profits.[4]  That is, the government would effectively (if not legally) own all businesses in the industry: it would make all business decisions and prohibit private control of any competing enterprises.

All three Medicare for All bills take the “single payer” principle literally and have the government taking over the health insurance industry.  The Federal government would monopolize the industry; private health insurance would be prohibited (it would be legal to sell insurance for “cosmetic surgery or other services and items that are not medically necessary” -- is that health insurance?).  Under the new House bill, the same applies to the medical-advertising industry.  This is contrary to the current Medicare system, which has thousands of private providers, more than one thousand private insurers, and permits advertising.

If consumers were better served by an industry with zero net operating surplus, the prohibition of private enterprises might seem redundant because they would be outcompeted by a nonexploitive (and unsubsidized) government business.  A second justification is therefore added: that health insurance – if not health care in general – has virtually unlimited economies of scale.  A government monopoly of health insurance would purportedly “be more productive by avoiding 'waste' on administrative costs, advertising costs, and profits and would use its bargaining power to obtain better deals from healthcare providers.”[5]

The new house bill also has the Federal government monopolize the dissemination of information to patients and health providers about health goods and services.  Specifically, providers are prohibited from advertising/marketing/promoting their health goods and services and, based on the costs of dissemination, we presume that the Federal government would be the only institution doing it.[6]  Under current Federal policy, providers are permitted to advertise, especially when product promotions involve discounts or the provision of product information.  This activity is especially significant in the pharmaceutical industry, where resources are spent disseminating pharmaceutical information to health professionals.

Central planning: all capital investment is directed and financed by the Federal government

Providers, which would have no profits, are prohibited by the new House bill from using M4A reimbursements to pay for capital investments (Sections 614(b), 614(d) and 611(b)(3)). Capital investments would be approved, prioritized, and financed by the Federal Department of Health and Human Services (HHS).[7]  Charitable contributions cannot be used to supplement the HHS capital budget (Section 614(c)(4)).

In contrast, the current Medicare program allows providers and insurers to make capital investments without HHS approval.

“Free”: Patients receive health goods and services with zero cost sharing

Aside from the normal tax obligations, none of the four M4A bills charge patients for health insurance premiums or at the point of use. 

In contrast, the current Medicare program has premiums and copays to be paid by program participants.

Other countries’ health programs are not so Marxist

Nordic countries are held up as purported proof of concept for Medicare for All, but in fact they do not adopt any of the Marxist provisions above.

All of the Nordic countries’ health systems have user fees or out-of-pocket payments, whose share of overall health spending is similar to what it is currently the case in the United States—although Denmark is the Nordic outlier, in that its patient cost sharing is essentially limited to prescription drugs.[8]

Private and for-profit health providers and health insurers exist in these countries and are accounting for a growing share of the market.

Private health insurance is important in a number of other universal-coverage countries, such as Switzerland, where all residents are required to purchase health insurance.[9]

Even single-payer countries allow providers to promote their products to health professionals.[10]

[1] Marx 1867 refers to net operating surplus as “surplus value.”
[2] Time preference is the term familiar from modern economics; Marx (1867, Chapter 24) called it “abstinence.”
[3] H.R. 1384 Section 614(a), emphasis added.  See also Section 103 of H.R. 676 that requires all health providers to surrender their for-profit status.  For an alternative view, see McCloskey (2016, esp. Chapter 59 and 61).
[4] Marx (1867) focuses more on the existence and magnitude of surplus value rather than the ownership relations that allow it to exist.  See also Roemer (1982).
[5] Quoted from CEA (2019, p. 420).  For evidence of the modern currency of these views, see Kliff (2014), Kliff (2018), Frank (2017), Konrad (2017), and Weisbart (2012).  CEA (2019) notes that historical nationalizations were justified on similar grounds.
[6] H.R. 1384 Section 614(b)(1).
[7] Section 614(c).  Capital investments are defined to be "the construction or renovation of health care facilities, excluding congregate or segregated facilities for individuals with disabilities who receive long term care services and support; and major equipment purchases." (Section 601(a)(6)) and later as "expenses for the purchase, lease, construction, or renovation of capital facilities and for major equipment."
[8] Universal coverage systems are common internationally, but they are different from free health care and from single-payer systems.  Regarding cost sharing, see Rice et al. (2018); Globerman (2016); Anell, Glenngård, and Merkur (2012); Olejaz et al. (2012); Ringard et al. (2013); Sigurgeirsdóttir, Waagfjörð, and Maresso (2014); and Vuorenkoski, Mladovsky, and Mossialos (2008).
[9] See Sturny (2017). The Netherlands achieves universal coverage by mandating the purchase of health insurance from private insurers (Wammes et al. 2017). Private health insurance is also required in Japan (Matsuda 2017).

Saturday, July 6, 2019

Marxist Perspectives on White House Staff Turnover

The labor theory of value (a.k.a., law of value) is an aspect of Marxist theory that still thrives in the marketplace of ideas.  It values anything and everything according to how much labor went into it.

Therefore, for example, Ben Rhodes contributed at least thrice more to the Federal government than, say, Brian Blase because Rhodes served 96 months in the Obama White House (as Deputy National Security Advisor) while Blase served only 29 (as Special Assistant to President Trump for Healthcare Policy).

But let's look at why Rhodes' tenure was 96 months whereas Blase's was 29.  Chapter 23 of Rhodes' memoirs explains that as of 2014 (roughly 70 months in), he expected that his policy accomplishments were still unfinished.
  • Normalizing relations with Cuba (to my personal benefit) did not begin until the 71st month; the President's trip to Cuba was in the 86th month.
  • The Iran deal was not reached until the 78th month.
  • Intervention in Libya (26th month) may have felt like a policy success at the time (Chapter 18 quotes President Obama as saying "In Libya, everything went right--we saved thousands of lives, we didn't have a single casualty...").
Brian Blase's important policy accomplishments came sooner.  He led three (sic) Federal agencies to coauthor three transformative Federal deregulatory actions that were celebrated in the White House Rose Garden in Blase's 29th month.
Indeed, these health insurance deregulations accomplished in 29 months have, as a share of national income, net benefits that are more than half of the legendary deregulation of airlines that began during the Carter Administration, which took more than twice the time that health insurance deregulation did.

Another example is Andrew Bremberg, who served 24 months as President Trump's Director of the National Policy Council.  He had many accomplishments during that time, the most legendary being his leadership of the Administration and the 115th Congress to deregulate by way of the Congressional Review Act.
  • Measured in terms of economic impact, this work was prolific.
  • 16 separate pieces of legislation deregulated education, mining, retirement accounts, and more.  They are expected to increase annual real incomes by more than $40 billion.
  • All of this was achieved in only 15 months.
COS General Kelly (17 months) is another example.  He came early in the Administration when more efficient operating procedures were needed and, as in earlier Administrations (this one had its first-year middle-east policy dictated by leaks), leaks needed to be reduced.  Like Doug Collins did for the Jordan-era Chicago Bulls, General Kelly improved the organization.  With Kelly's accomplishments in place, it was time for a different set of talents.  Mulvaney is the White House's Phil Jackson with both political successes (i.e., winning elections himself) and an impressive analytical mind.

Undoubtedly there are Trump Administration officials with both short tenures and short accomplishments.  But the above is enough to show how misleading are the turnover statistics.

You might assert that Blase and Bremberg had easier jobs than Rhodes did because the former were "merely" undoing actions of a previous Administration.  That assertion certifies mastery of the labor theory of value.

[The labor theory of value has endured since Marx.  Other important parts of Marxist theory did not, but made a comeback relatively.  I will write about those next.]

Thursday, July 4, 2019

Who recognizes economic history first: politicians or economists?

Figure 1 is the familiar chart showing the “Laffer curve” relationship between a tax rate and the net revenue from the tax.  A small tax on, say, wireless internet service is expected to provide more revenue (point B) than would be obtained without any tax on wireless internet service (point A).  It is conceivable that the wireless internet tax rate could get so high that further increases in the rate actually reduce revenue (point C) as consumers take steps to evade taxation altogether.  At point C, economics gets really interesting because many of the difficult public policy marginal tradeoffs disappear.

When it comes to various taxes in the United States, at least, we economists typically expect that the operative point is B.  E.g., the Federal payroll tax is probably at a point where further increases in the rate would raise at least some revenue, albeit less than static scores that make little distinction between points A and B.

The statutory Federal corporate rate is an interesting case, especially three years ago when it was well above rates elsewhere in the world.  Arguably cutting that rate increased Federal revenue as at point C (combined revenues from payroll, personal income, and corporate income).  But other reasonable experts could opine that point B was and is the operative point for the corporate tax rate.  And even these opposing experts would likely agree that the operative point (B or C) is above point A where the tax is abolished.

My only point here is that we would be at a unique chapter in economic history if a tax were obviously at point C or beyond.  So turn now to Figure 2, especially its point D where the government receives more revenue by abolishing the tax.  This was the case with the Affordable Care Act’s tax on uninsurance (a.k.a., individual mandate tax).

(I cannot say for sure how the path evolves between points A and D, e.g., perhaps the path never crosses above the horizontal axis, but that issue is not important for what follows.)

The first chapter of my ACA book explained what was happening, using the story of Pastor Ben Winslett who described how the ACA “has placed an enormous financial burden on normal, everyday people quite literally forcing us onto government assistance we didn’t need before.”  In other words, the individual mandate penalized people for turning down government assistance!  Mick Mulvaney explains here.

The government saves money by reducing the punishment it imposes on people who turn down subsidies because more people turn down the subsidies.

You don’t have to believe me.  Look at Jonathan Gruber’s 2010 analysis of repealing the individual mandate, where he projected (p. 4) that repealing it would reduce Federal spending by about $46 billion per year, while sacrificing much less than that in terms of mandate collections.  Or the Congressional Budget Office projection that repealing the mandate would reduce Federal spending by about $34 billion per year, while sacrificing much less than that in terms of mandate collections.  I (and the current CEA) think that those two estimates are exaggerated, but if Gruber and CBO stand by their qualitative analysis then all four of us must agree that point D is the operative point.

Having a tax at point D easily makes the highlights of economic history. Neither my book (which focused on the subsidies and the employer mandate), Gruber’s report, nor the CBO’s report put their findings on the individual mandate in the context of a Laffer curve let alone follow up with an estimate of the massive economic damage that comes with pushing a tax down to point D.  It should be no surprise that, in doing the necessary work, the current CEA found massive net benefits of moving from point D to point A even after considering the various benefits of expanding health insurance coverage.

President Trump and Congressional Republicans recognized the historical damage done by the individual mandate well before economists did, even while it is economists who specialize in such matters.  President Trump reached the (important and correct) conclusion sooner because he reasons differently on issues like this.  Simulated annealing is a close analogy that I’ll write about later.  He did not get ahead of us by “playing 3 dimensional chess” or drawing Figure 2: that would be the kind of deductive reasoning that is prevalent in economics and proved slower at reaching the answer.  Many critiques of the President assume that deduction is the only method and thereby entirely miss the point of simulated annealing, which is that he would try both criticizing the mandate and (albeit briefly) praising it and then closely monitor the feedback.  I suspect that members of Congress did something similar (President Obama also recognized -- just privately until he left office -- that there was more to the individual mandate than the technocrats were telling him).

Health regulation is just one area of Federal policy where some of the most interesting economic history is happening now….