White House Attitudes toward Fraud: Evidence from 75 ERPs

Judging from their Economic Reports, few Presidents have given much thought to the problems of fraud.  When they do, typically private sector fraud is cited as a reason for government regulation.  Prior to 2019, ERPs rarely included analysis of incentives to prevent fraud, and never explained why those incentives would be different when the victim of fraud is a private entity as opposed to taxpayers.  Does this reflect a (noneconomic) view that fraud is a consequence of bad people rather than poor incentives?

ERPs hardly mentioned fraud before Clinton.  His ERPs cite financial fraud (especially credit card fraud, which had grown with the industry itself) and healthcare providers that fraudulently miscode treatments in order to enhance their receipts from government and other insurance.

George W. Bush has two interesting chapters on "The Tort System" (2004, explaining how the threat of future tort damages is a disincentive for fraud) and, following the Enron scandal, a chapter on "Corporate Governance" (2003).  These are the two exceptions where incentives are noted, although the analysis is not applied to frauds perpetrated against taxpayers.  Bush's ERPs also discuss fraud in the growing ecommerce industry.

The Affordable Care Act was sold on many false pretenses, one of which is that it would be cracking down on fraud.  President Obama's ERP repeated this talking point in 2010, 2011, and 2013 without an analysis of what the ACA was actually doing to incentives to perpetrate fraud or to incentives to prevent it.  Here is a clip of President Obama himself bragging about "cracking down on fraud."

A prime example of what was missing: the fact that the states, which administer eligibility for Medicaid, would have hardly any financial responsibility for the new parts of Medicaid (by no coincidence, the new parts require more effort to police eligibility).  Are we surprised that in reality "Improper Medicaid Payments have Soared Since Obamacare"?  More well known is the "epidemic of identity theft" that followed the opening of ACA insurance applications.

In a chapter about the Economics of Socialism, the 2019 ERP discusses the incentives associated with  "spending other people's money on other people."  On this basis, government health insurance programs are not expected to put much effort into policing fraud -- turning down a legitimate claim makes for political embarrassment whereas quietly paying a fraudulent claim falls on the taxpayer who has no part in managing the plan.  While they brag about "low administrative costs," the government plans are implicitly acknowledging how little effort they put into administration as compared to plans with a profit motive or that must attract voluntary consumers with low premiums.

Although it does not discuss the incentives, the 2016 ERP offers an empirical observation along these lines.  Several pages discuss the lightly regulated "On-Demand Economy," and compliments private industry for innovative ways (especially, rating systems) of reducing fraud against the consumer.

The 2018 ERP included a popular chapter about cyberthreats.  Another half chapter followed in 2019.  The 2021 ERP looked at the role of trade agreements with China in encouraging them to partner with the U.S. in preventing cyber-theft.  It also looked ahead to infrastructure investment, including attention to cyberthreats.

President Biden's economic team may not be in a good position to consider fraud.  So far it has emphasized setting records on metrics like the size of the weekly unemployment benefit, the speed of delivering stimulus payments, and the number of people participating in the programs.  Nigerian criminals have found Biden's appointment for administering federal UI to be an especially incapable gatekeeper.  She will have near veto power over anything Biden's economic team publishes on this subject.

2021 has begun with another epidemic of identity theft, especially in blue states.  President Biden's economic team can help, if they are willing and able.

[Some economists may say that fraud is just a transfer and therefore that policing fraud is a social waste (from a worldwide perspective).  But the criminals also use resources in their craft, not to mention that the funds they steal must be extracted from taxpayers which involves another deadweight cost.] 

The Economic Impact of Sanders’ Radical Agenda

If fully implemented, but otherwise implemented wisely, Senator Sanders’ agenda for the economy would reduce real GDP and consumption by 24 percent.  Real wages would fall more than 50 percent after taxes.  Employment and hours would fall 16 percent combined.  There would be less total healthcare, less childcare, less energy available to households, and less value added in the university sector.  Although it is more difficult to forecast, the stock market would likely fall more than 50 percent.

Previous analysis of Medicare for All

When I was at CEA, we used an extension of the neoclassical growth model to assess the economic impact of “Medicare for All” (M4A), which we charitably interpreted as 100 percent public financing of the health sector, with (in Chapter 8 of the 2019 ERP) nobody consuming less healthcare and many consuming more than in the baseline.  We also charitably assumed that the public financing would occur with taxes that have minimum efficiency loss per dollar collected.

Arguably the Laffer curve for payroll and consumption taxes is not high enough to finance M4A, but at CEA we charitably assumed that the tax base is inelastic enough to rule out this possibility.  As reported in the 2019 Economic Report of the President, we concluded that payroll tax rates would increase 14 percentage points and tax payments would increase an average of $18,000 per household per year.  Real national income and GDP would fall 9 percent.  Real national income net of taxes and health spending would fall 19 percent.  These result from M4A by itself, and are a best-case scenario.

Considering Sanders’ Agenda More Fully: Factors of Production

My purpose here is to consider Sanders’ agenda more fully, including free public college, free childcare, and a full transformation of the energy sector.  I will also consider the fact, confirmed repeatedly in history, that nationalizing industries will reduce their productivity.  Overall productivity will also decline somewhat as the economy is reregulated (including perhaps a $15 minimum wage and regulating employee-management relations) enough to be put on the pre-2016 regulatory growth path.  A Federal jobs guarantee or a student loan bailout would also not be pretty, but I have not yet quantified it.

I assume that what is currently household spending on public college tuition and on daycare (1.75 percent of aggregate consumption) will become “free” and that these resources will see their utilization increase by the same percentage as healthcare.  Under the assumption that a Sanders administration would provide Federal assistance to nonrich households that are burdened by the high energy prices that come with the Green New Deal, I also expand the Federal budget for that purpose by another two percent of baseline consumption.

Even if without any productivity loss or increased utilization in healthcare, college, and daycare, this means that the Sanders agenda would be expanding the Federal budget by 13.25 percent of baseline consumption.  Including 19 percent additional utilization of these “free” goods and services, tax rates on labor income must increase by 23.5 percentage points (it would be more but the Sanders agenda does expand the tax base by eliminating the exclusion for employer-sponsored health insurance).  GDP falls by 16 percent (this does not yet consider productivity losses -- that comes below).

The simple, correct, but perennially forgotten, idea is that it matters when we spend other people's money on other people.  Nationalizing an industry's revenue is NOT merely a matter of relabeling the dollars that people spend on that industry.  Moving the revenue over to the public purse removes all individual incentive to economize on the amount of spending and to ensure that the spending goes to the highest value activities.  The data matches the theory very well on this.

Considering Sanders’ Agenda More Fully: Productivity

The Sanders agenda puts the economy so close to the top of its Laffer curve that there is no additional revenue to finance the additional inputs into healthcare, college, and daycare that would be needed if those industries suffered any productivity loss.  If their productivity fell by 25 percent, which is optimistic as nationalizations go (see Chapter 8 of the 2019 ERP), then the output of those industries would have to be cut by 25 percent.  To be clear, the result would be less healthcare, less college, and less daycare.

The Sanders agenda will reregulate the economy.  I optimistically (i.e., charitably to the Sanders agenda) project the regulation to be a return to the pre-2016 regulatory trend plus cutting energy productivity in half.  CEA estimated that the pre-2016 trend was to reduce productivity by 0.16 percent per year (see Chapter 3 of the 2020 ERP), which would be 1.3 percent by 2024.  I also assume that a President Sanders would undo President Trump’s deregulatory agenda and his corporate tax cut and thereby reduce productivity by another 3.3 percent.  Taking energy as 3 percent of the economy, the climate change part of the Sanders agenda would (again, optimistically) reduce productivity by 3 percent.  Adding these to the productivity losses in the nationalized industries, that is 10.9 percent less productivity.

Overall, real GDP and consumption would fall 24 percent.  Employment and hours would fall 16 percent combined.  Real wages would fall 11 percent before taxes.  After-tax real wages would fall 51 percent.

This is akin to the Great Depression of the 1930s, except that the Great Depression was eventually followed by a recovery whereas the Sanders agenda (I assume) does not involve eventually putting policies back to the way President Trump had them.  Therefore the stock market would fall at least what it did in 1929, which was almost 50 percent.

Don’t Take Sanders Literally

As an academic exercise, I have taken Sanders literally.  That is not a good forecast of what his policies would be.  If nothing else, his promises are so damaging that the rest of our political system would water them down.  Indeed, Sanders surrogates such as AOC have been saying as much to assure (sic) nervous voters.

None of this denies that Sanders, whose candidacy I have followed for five years, is compelling.  Marxism itself is powerfully irresistible, surviving over a century in the marketplace for ideas.  But it's more than that.  Outside the Washington bubble, there is a demand for disruption rooted in real substance.  Not as much as in 2016, but still there.  People also understandably admire how Sanders' episodes of honesty are so frequent by the standards of conventional politicians.  My favorite example is his 2016 economics white paper, which openly acknowledges the existence of serious people with the opposite view (see especially footnotes 21 and 36), which is exactly the view I express above.


[Appendix on climate effects:

My GDP estimates do not include any climate damage.  M4A is a big part of the Sanders agenda, and has nothing to do with environment.  As shown in Chapter 4 of the 2020 ERP, banning fracking, which is part of the Sanders agenda, makes climate change worse.   To the extent that worse climate means less GDP for the U.S. (climate change is mostly a world GDP effect rather than U.S. GDP?), that would add to the GDP impact I calculated.  On the other hand, other parts of the Sanders agenda might help with climate change.  Also, whaat's above looks at economic impacts in a 5-10 year time frame, whereas effects through climate change will take decades.]

Trump's economists will be missed

When the day comes (year 2029?) that a "progressive" Democrat occupies the White House, we can look with nostalgia on the good old days 2017ff when White House economists literally followed the textbook.

Surely the economists working for that new President will be no smarter than UC Berkeley's Emmanuel Saez.  In his primary defense of Medicare for All, Mr. Saez now writes that payments to private health insurance are "just like taxes."

Saez understands that those brainwashed by old school economics will be thinking "health insurance premiums [cannot be] a tax [because] people have some choice."  Their mistake, he says, is that unlike "spending on food and clothes," premiums for employer HI are "mandatory." (The equivalence of premium and tax is also a central premise of their new book, especially Chapter 5).

Mr. Saez is showing his ignorance about American law, and that he is too lazy to take even a cursory look at the data.

Regarding the law, no one is required to purchase health insurance.  Yes the Affordable Care Act requires either purchasing or paying a penalty, but the PENALTY IS ZERO and furthermore there are many loopholes built into the law.

As an empirical matter, more than half of American workers are NOT having health insurance taken out of their paycheck.  Even the Saez article admits that cash wages are higher compared to having HI taken taking out.  So those workers who pay health insurance through their paycheck have chosen not to have one of those tens of millions of jobs with higher cash pay but no health benefit.

Let's put this another way: Would Candidate Warren promise that American workers can have the same alternatives to paying payroll and income taxes that they currently have for having HI premiums taken out of their paychecks?  I didn't think so.

[There are many other problems with Saez' assertion, e.g., how a payroll tax as compared with HI premiums would vary with employment, income, hours, etc., but the above is enough to show how he is wrong on his own terms.]

Medicare for All has Been Around for Years

Below is a chart of the fraction of Democrats (including Independents who caucus with Democrats)  that sponsor or cosponsor "Medicare for All" (M4A) bills, including Senator Bernie Sanders' earlier versions under the title "American Health Security Act."  All of these would prohibit private health insurance (Ted Kennedy's "Medicare for All" bills are not included).

This shows that M4A has enjoyed significant support for a number of years.  What is recent is for people to recognize what the bills actually say.

Marxist Provisions in "Medicare for All"

This post refers to four bills entitled “Medicare for All”: two introduced in the previous Congress (S.1804, H.R.676) and two bills recently introduced in the current Congress (S.1129, H.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]

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[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.” (Later Böhm-Bawerk 1890 distinguished the abstinence theory from the modern idea of time preference, but the distinction is unrelated to Marx's discussion of 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).

[10] https://united-kingdom.taylorwessing.com/synapse/medicine_regulation.html

Critiques of Single-payer: Why Did They Take So Long to be Discovered?

It is now routine for Democrats to be asked in town halls, debates, etc. "Who here would abolish their private health insurance in favor of a government-run plan?"  But why did it take so long to pose this question to advocates of "single-payer" health systems?

As a matter of economics, it should be obvious that the health insurance market would not be served by a single seller unless there were tremendous barriers to entry.  E.g., criminalizing any private enterprise that attempts to sell or otherwise provide health insurance.  Without stark penalties, regardless of the details of government plans, there would be gains from trade between private insurers and at least a small segment of consumers if not more.  With private insurers, the market is no longer "single payer" (as long as "single" refers to "one"). 

For this reason, bills in Congress proposing to transform the U.S. market into single payer outlaw private health insurance.  Take Senator Bernie Sanders 2013 (sic) American Health Security Act's "enactment of a Medicare-for-All Single Payer Health Care System" by "Requir[ing] each state health security program to prohibit the sale of health insurance in that state...."

Why didn't Mrs. Clinton ever raise this point when Senator Sanders was campaigning against her for the 2016 Democratic nomination?

Why didn't Joe Crowley raise this point when campaigning against AOC in 2018?

One possible answer is overconfidence in victory.  But overconfidence did not stop Clinton supporters from calling Sanders a socialist during the 2016 primary, or Clinton positioning herself as a defender of capitalism.  Why not make it more concrete to regular people and alert the 180 million consumers of private health insurance that their product would become illegal?

I think part of the answer is that few people actually read the single-payer bills in Congress (I observed the same with the "stimulus" law and with the ACA) or think through the economics of how single payer can operate even in principle.

From the first day I arrived at White House CEA, I told anyone who would listen: "Medicare for All bills in Congress will outlaw the sale of private health insurance and outlaw the provision of health insurance as part of employment."  They thought I was kidding.  Because capable politicians do not give such gifts to their opponents, what I said could not be true.  I began carrying the relevant bill sections in my jacket pocket for the benefit of the doubting Thomases; only after that did the President's speeches (which are preread by EOP staff) begin to include the disturbing and incredible truths about "Medicare for All" (an earlier alarm bell was here).

It turns out that I have a talent for finding rock-solid facts that journalists would vigorously deny (see Jim Acosta here, noting that the President wrote about "the Democrat proposal 'Medicare for All'", which USA today shortened to "Democrats" in its byline).  A few months later, journalists finally stopped denying the plain text of the Medicare for All bill and began querying Democrats as to whether they support the abolition of private health insurance.

(Medicare for All bills also adhere remarkably closely to Marxist theory, but that is primarily of academic interest so I will post on it later.)

[For those interested in the technicalities, Medicare for All outlaws any private insurance (individual or employer) that covers any normal medical service.  Specifically (from page 421 the 2019 Economic Report of the President, referring to the 2017 bills): “medically necessary or appropriate”

• hospital services,

• ambulatory patient services,

• primary and preventive services,

• prescription drugs,

• medical devices,

• biological products,

• mental health services,

• substance abuse treatment,

• laboratory/diagnostic services,

• reproductive care,

• maternity care,

• newborn care,

• pediatrics,

• oral health services,

• audiology services,

• vision services, or short-term rehabilitative and habilitative services and devices (sections 107 and 201 of the “Medicare for All” Act of 2017 and section 104 of the House bill).

The House bill (section 102) goes further with

• dietary and nutritional therapies,

• long-term care,

• palliative care,

• chiropractic services,

• and podiatric care.

The 2019 bills further add to this list. 

]