SOTU Thoughts

President Obama will give the SOTU in five minutes. It will be very interesting to see what remarks he has on health care reform. I can see him going one of three ways: 1. Trying to sell reform and implore the House to finish up the job; 2. Also suggest a path to a scaled down health care bill; 3. Not mentioning it. My guess is he will go with option 1. There is some discussion bubbling up that the House would be willing to vote on the Senate bill if the Senate took up amendments to the Senate version in Reconciliation. The other big expectations are that Obama will publicly push Congress to repeal "Don't Ask, Don't Tell". Obama is also expected to announce a spending freeze in discretionary spending. That is small beer. The other issue to watch out for is financial reform.

The Apple iPad

It will f$%k you up for life. Just Kidding. I don't really get it. It seems like a netbook with a little more content. It looks really pretty and some people think it will be the neatest thing since sliced bread. My track record is horrible on these things.

note: I don't think my predictions were totally off base about the smart car. They haven't taken the world by storm but they are common enough to be considered mainstream (to the extent that driving a clown car can be considered mainstream).

More Proof that NoVa is better than MoCo

Courtesy of Urban Turf.

PeP Link Farm

Saab is officially undead.

Union membership dropped 10% last year. Which makes it all the more galling that the House won't vote on the senate health care bill so as to appease unions (why appease them when they are disappearing).

Bruce Bartlett discusses Obama's plan for a discretionary budget freeze- partying like it's 1937 again.

Ezra Klein wonders why Obama is proposing the discretionary budget freeze in a vacuum as opposed to using it as a negotiating ploy. I wonder myself, seems like an unforced error.

Garret Jones has a provocative twitter- If you want to decrease spending increase earmarks.

Chuck Schumer and Orrin Hatch have an op-ed in the NY Times proposing a temporary cut in the employer portion of the payroll tax to stimulate employment. This is something we should have done with the first stimulus.

Ezra Klein has a sort of stupid take on the Hatch proposal, but not completely wrong. He sees the virtue of the proposal as harnessing the rich's irrational desire to avoid taxes. I think most would simply note that its chief virtue is reducing the cost of hiring someone. I suppose though they are two sides of the same coin.

Raghuram Rajan proposes eliminating deposit insurance. It's certainly a provocative proposal.

My Modest, Scaled Down Bipartisan Healthcare Plan

Step 1- Revenues and moving away from the employer-based system-

I propose a full phase out of the employer exclusion for those with incomes above $125 k for an individual/ $250 k for a household. This would only yield a modest amount of revenue assuming a static model. There aren't all that many households that would fall into bracket, however, those that do tend to be upper middle management. I think once hr directors across the country see their tax liability go up anywhere from $2-5k that they may rethink the virtues of having their company "provide" their healthcare. This would not cause every company to cash out their fringe benefits and only pay cash wages but it would significantly shift things in this direction.

Now, obviously, getting rid of the employer exclusion would transform compensation norms away from non-taxable benefits to taxable wages much more quickly, but this is probably not politically possible. One could argue that touching the employer exclusion is basically impossible as evidenced by the fact that an incredibly weak excise tax (this was basically a roundabout way of gradually eroding the employer exclusion-really gradually, like decades) sent labor into a tizzy and is arguably the proximate cause for the failure of current health reform bill (that and the fact that house democrats are apparently stupid and timid). I think what distinguishes this proposal is that labor's ox is not getting gored by and large. Most union members do make good salaries but not on this order. Rather, it is a soak the rich proposal which usually is politically palatable. The strength of the proposal is not that the rich will be successfully soaked but in attempting to avoid being soaked explicitly will drastically change the way companies pay their employees. Far fetched, I don't think so.

Step 2- Dump people into the individual market and let them buy insurance across state lines

I know, the individual insurance market is horrible, yadda yadda yadda. One of the basic problems with the individual market is that many states suffer from minimum benefit creep. If you live in New York or some other states where there are very generous mandated benefits chances are your choice is between buying a policy that is exorbitantly expensive and going uninsured. Given that you need food and shelter, the choice most people make is to go uninsured. In choosing between protecting folks from catastrophe on one side and providing insurance that has a no-copay for acupuncture treatments on the other side, I think the providing protection against catastrophic bit is more important.

Why propose buying across state lines as opposed to a national exchange? National exchanges, while a great idea in theory, are likely to be a cess pool for rent seeking. The notion of a basic catastrophic plan being offered unmolested by gentle nudges from the hill (in response to contributions from the AMA) is simply inconceivable. One could counter that without national exchanges, buying across state lines will promulgate a regulatory race to the bottom. Yes, this is a feature of my plan, not a bug (within reason, addressed later in the blog). In the end, my underlying assumption is that we insure ourselves in a perverse manner, and are incentivized to do so by tax incentives. I don't think it is necessary to add third and fourth parties to a simple transaction covering a predictable expense. Thus, my optimal insurance plan would be a pure high deductible plan where you pay cash directly to the provider until you hit the deductible where the insurer would take over (as the deductible would be around $2,500 for an individual the likelihood that you would hit it in a given year is very low). By going the federalism route such a insurance product is more likely to survive.

Step 3. Mandate a couple of insurance reforms- no rescission, guaranteed issue

The danger of buying across state lines and the attendant race to the bottom is the prospect of incentivizing rescission. Ban it, problem solved. This would make premiums more expensive, however...

Step 4. A Federal Catastrophic Reinsurance Plan

People with pre-existing conditions are basically uninsurable. I liked John Kerry's proposal during the 2004 campaign for catastrophic reinsurance. The basic contours of his plan was that after a certain threshold (I think it was $75k) the government would pay half the cost. I wouldn't touch community rating however as it does away with the one thing insurers do well, price risk(never mind that whole AIG thing, nothing to see here). If there was a federal catastrophic reinsurance plan insurers wouldn't have the incentive, or nearly as much of one to screen for pre-existing conditions, but they would have an incentive to price according to certain unhealthy behaviors- like smoking.

Step 5. Use revenues from step 1 to provide a refundable tax credit to those under 200% of the poverty line in amount sufficient to cover the premium and 75% of the deductible. Phase out the deductible contribution and premium coverage by 350% above the poverty level.

Step 6. An individual mandate. Again, if people want to blow their nonrefundable tax credit on crack that is fine with me, but they should have to pay a penalty. A HDHP by itself in VA (my lovely home state) is about $1500 per annum. A penalty of $500 would probably incent most to go ahead an buy the insurance.

Sidebar- Federalize medicaid and get rid of the State and Local tax deduction.

This plan would be considerably less expensive than the currently proposed one, would do more to reform the system, and in the long run would have greater likelihood of containing costs. It would probably be disruptive though.

Volt Coming To D.C.

D.C. will be joining Michigan and California as the first markets where the Chevy Volt will be sold.

Beating a Dead Horse

"In its present form without any changes I don't think it's possible to pass the Senate bill in the House," Pelosi said, adding, "I don't see the votes for it at this time."

This is amazing to me.

Learning to Love Glass-Steagall All Over Again

President Obama appears to be pushing for financial reform and it looks like he has shifted directions in a positive direction (away from the influence of Geithner and Summers and towards Paul Volcker). The principle objective of the reform seems to be to walk back from the Too Big to Fail doctrine and to fashion a new Glass-Steagall.

Health Care Reform is Dead

Labor is throwing a fuss about the excise tax and has now declared opposition to the Senate bill.

I think this effectively kills the reform effort. Even with Brown's election the house could vote on the Senate bill that has passed exactly as it was written and pass it into law (the ping-pong route). This would obviate the need for an additional senate cloture vote that would be necessary if the bill went to conference, which became increasingly important as of yesterday when the Democrats lost their 60th vote. However, now that labor is opposing the senate bill this makes ping pong route unlikely.

The Senate could try to craft new legislation but it no longer has the 60 votes unless it is able to turn a republican or two. Obviously this raises Olympia Snowe's importance. The important question is will Olympia Snowe be willing to ditch the excise tax and embrace a revenue measure that is likely to pass in the house (such as a surcharge on top-earners). I view this as unlikely.

I still think some bill will be passed that is called health care reform but it will be substantially less ambitious.

Playoff Blogging

I think Neil Rackers is gong to be looking for a new job.

Pricing Transparency in Health Care

Matt Yglesias, normally super intelligent blogger, has made a breathtakingly stupid argument against the potential efficacy of pricing transparency in health care:

"I went to the Maine version of this idea and decided to pretend that I was living at my dad’s summer house in North Brooklin, ME and was considering my hospital options. It turns out that the closest place to get a knee MRI costs $1,550 and is a 40 minute drive to Ellsworth. There are two slightly cheaper options in Bangor—$1,159 or $1,160—but that’s more like a 75-80 minute drive. So the competition in this market is not very fierce. Bangor is the second-largest city in the state; it’s not convenient to get there from Brooklin, and even there you only have two options. Possibly not the best test case for these ideas."

An additional hour of driving would save the hypothetical patient $350. How many jobs pay you $350 per hour? Unless you work for Goldman Sachs, work for KPMG fudging Goldman Sachs books, or are a lawyer helping Goldman Sachs fudge their financial statements, very few. The problem is twofold: 1) Most people lack the information to comparison shop (health care reform should remedy this), and 2) people largely lack the incentive to use that information to economize (health care reform will not remedy this, rather it will exacerbate this trend). Presently people do not have the incentive to economize as they are not directly paying for the procedure. Rather, the insurer is paying for the procedure and then passing on the additional cost in the form of higher premiums. If people were exposed to the additional cost then they would have an incentive to economize it would drive prices down and also premiums.

How to Chase Off Foreign Investment and Destroy the Welfare of Your Nation

Hugo Chavez is threatening to instantly deport all automakers with production capacity in Venezuela if they do not immediately share their proprietary technology with local businesses. Things like this do not make for a inviting investment climate for potential new entrants and for existing companies may nullify threats of deportation as companies may decide to up and leave of their own volition. The only impetus for such idiocy in my mind would be a concerted effort on Chavez part to meet and overtake Zimbabwe's Mugabe as worst world leader.

Christmas Links

This is crazy, check it out. A high rise fell over intact in Shanghai.

A really interesting blog post about the future of cell phones, cell companies, and Google.

Johnathon Chait says Republicans screwed up by trying to defeat health care reform instead of influence health care reform. I agree!

Matt Yglesias agrees with Chait and makes the obvious but interesting observation that by not participating in the reform process "they gave all their leverage away to Joe Lieberman and Ben Nelson, so we wound up with some weird freebies for Nebraska." This should have been obvious to any casual observer but somehow was still lost on Mitch McConnell.

Ezra Klein channels Tom Harkin who thinks the Nelson deal (getting full federal reimbursement for Medicaid expansion) might lead to full federalization of Medicaid.

Auction Broadcast Spectrum

Presently broadcast television is allocated a certain/significant amount of spectrum, spectrum that could be used for other applications such as broadband. What is galling about this arrangement is that the government is conferring a scarce and hence extremely valuable resource for free. Mark Cuban suggests reclaiming the spectrum and auctioning it off. I wholeheartedly agree. In general, outside of reserving spectrum for first responders and for national security reasons I don't understand why the default presumption isn't to auction spectrum.

update: Whoops! I was hasty. Cuban also makes a good counter argument, along the lines of national security/emergency response, for why you wouldn't want to sell off spectrum. Anyhow, it's in interesting post, read it (all the way through I should say).

Google Chrome Now Available for Macs

Beta version here. Jiggity.

Tyler Cowen has a good post on the problems with mandates, namely, mandate creep:

"Breaking a three-day stalemate, the Senate approved an amendment to its health care legislation that would require insurance companies to offer free mammograms and other preventive services to women.

The vote was 61 to 39, with three Republicans joining 56 Democrats and the two independents in favor."

Tyler leaves unexplored what this means for the proposed IMAC/IMAB (the medicare board that is supposed to propose cuts which congress can vote up or down). Ezra Klein and other progressive bloggers consistently tout the IMAC as a central mechanism for cost control. That said, congress voted to include this benefit just as study was released indicating that the US's mammogram protocol is probably too extensive, and thus too expensive for the benefit conferred. Or in other words, that it doesn't pass muster with respect to comparative effectiveness. This was a controversial finding, and I don't have the capacity to know whether it is dispositive. But, it does highlight a tradeoff, the type of tradeoff that the IMAC board will be proposing, ostensibly in order to "bend the curve". To me this says, unfortunately, that the IMAC proposal has little potential of "bending the curve" as Congress will always be loathe to cut benefits (especially seniors' benefits).

AARP and AMA Endorse Health Care Plan

What meaning can one discern from these endorsements? This certainly indicates a greater likelihood for passage of health care reform. However, it is also indicative of what two important groups (Seniors and Doctors) perceive of the likely success of cost controls.

AARP

AARP's endorsement indicates that it thinks one of two things will occur: (1) the proposed medicare savings (which represent the majority of the cost savings in the health care reform bill) will not affect seniors care; or, (2) the congress will never pursue the cost savings proposed (a la the annual kabuki with provider reimbursement rate cuts). This may be cynical, but I think AARP envisions the latter not the former transpiring.

AMA

Health Care reform would represent a boon to doctors in that it would expand the market for their services. There would be 21 million new, paying customers which would increase their overall volume and also the prices they can command. In theory, this would be mitigated to some degree by Medicare reimbursement cuts and reforms; but I suspect, the AMA also recognizes that these aspects of the health care reform are unlikely to materialize.

An Interesting if Incomplete Narrative on Income Inequality

From Arnold Kling:

"I think that perhaps the most important trend of the past thirty years is the increased importance of cognitive skills relative to physical labor. Obviously, this has been going on for more than just the past thirty years, but during the past thirty years we saw an acceleration. This has had a number of consequences:

1. It changed the role of women. Their comparative advantage went from housework to market work.

2. This in turn, as Wolfers and Stevenson have pointed out, changed the nature of marriage. Men and women look for complementarity in consumption rather than in production.

3. This in turn leads to more assortive mating, with achievement-oriented men looking for interesting mates rather than for good maids.

4. This in turn leads to greater inequality across households. It also fosters greater inequality among children. The children of two affluent parents are likely to have much better genetic and environmental endowments than the children of two (likely unmarried) low-income parents.

5. Inequality is exacerbated by globalization and technological change. If your comparative advantage is basic physical labor, you have to compete with machines as well is with workers from the Third World.

The net result is an economy that has improved considerably for people with high cognitive skills, but which has improved only somewhat for people with relatively low cognitive skills."

There is one thing that this narrative leaves out: the top 1%. It does seem that when you are looking at that top 1%, which has been pulling away from the rest of the population, I think you see two trends: 1) a greater return for entrepreneurs as a result of lower startup costs and easier access to capital (a positive development); 2) eroding social norms relating to CEO pay generally and the finance industry as a whole thus enabling CEO/finance to extract greater rents from shareholders.

UAW's Game Plan

Labor is its own worst enemy. The UAW membership are killing a plan that their leadership negotiated with Ford management that was more generous than they obtained from Chrysler and GM (courtesy of Uncle Sam and their respective perverted and politicized bankruptcies). While Ford seems to be turning around and has a decent cash cushion, it also has a pile of debt and a decreasing though still significant burn rate. This seems quite foolish on the UAW's part. If Ford continues to be at a labor induced competitive disadvantage (compared to non-UAW manufacturers and now Chrysler/GM which are partially owned by the UAW) chapter 11 is likely in its future. There is a greater likelihood by that time that some entity other than Uncle Sam will be able to provide Debtor-in-Possession financing in which case it is unlikely that the bankruptcy proceedings will be tilted to the UAW's benefit as much as they were for GM and Chrysler.

Cowen on Mandates

Tyler Cowen has an article on the problem with the individual mandate. I think his point is valid but without a mandate you have a significant free rider issue. I have been going back and forth on which is better: buying across state lines or setting up a national exchange. The principal concern I have with a national exchange is that it will increase the prospect of regulatory capture by the AMA. If it is the only means of purchasing health care there is a risk that doctors will lobby congress to mandate benefits ultimately causing an increase in premiums. That said, a national exchange is better equipped to deal adverse selection since you could conduct an ex post risk adjustment on all providers on the exchange to ensure that insurers do not select only good risks.