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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

A Monetary Policy for the 21st Century



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Mark Blyth, a professor of international political economy at Brown and author of Austerity: The History of a Dangerous Idea, and Eric Lonergan, a hedge fund manager and author of Money, have a provocative article in the new Foreign Affairs that calls for the use of “helicopter drops” as a tool of monetary policy. As a fan of the London-based entrepreneur and writer Ashwin Parameswaran, a longtime proponent of helicopter drops, I was delighted to see the idea given such a prominent place in an influential magazine. What impresses me most about Blyth and Lonergan’s article is that unlike many other critics of austerity, they recognize that austerity isn’t just about spending cuts; it is also about tax increases. And they make a number of arguments that at least have the potential to appeal to right-of-center skeptics of quantitative easing and calls for debt-financed infrastructure investment as a recession-fighting tool.

First, the basic mechanism: 

Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality.

Such an approach would represent the first significant innovation in monetary policy since the inception of central banking, yet it would not be a radical departure from the status quo. Most citizens already trust their central banks to manipulate interest rates. And rate changes are just as redistributive as cash transfers. When interest rates go down, for example, those borrowing at adjustable rates end up benefiting, whereas those who save — and thus depend more on interest income — lose out.

My own view is that given anxieties about the politicization of central banks, which Blyth and Lonergan acknowledge, it would be preferable to distribute cash equally to all households, on the grounds that such an approach is more “neutral,” and that it can safely ignore income fluctuations and disincentives (minor though they might be) at the margin. Those who are drawn to Blyth and Lonergan’s approach on egalitarian grounds might object to such a universal transfer, but they shouldn’t, as it is an alternative to the far more inegalitarian quantitative easing approach, the main effect of which is to prop up asset prices. As Parameswaran has argued, the chief benefit of helicopter drops is that instead of propping up asset prices (and bailing out big banks and business enterprises, a subject to which we will return), they “mitigate the consequences of macroeconomic volatility upon the people.” While quantitative easing and bailouts disproportionately benefit the asset-owning rich, helicopter drops leave the household income distribution untouched, leaving the question of redistribution to lawmakers. All that said, Blyth and Lonergan’s favored approach, in which households in the top fifth are excluded from the transfer, strikes me as preferable to the status quo. 

But wouldn’t helicopter drops create inflationary pressures? Blyth and Lonergan argue that inflation fears are overblown, as helicopter drops would be a flexible tool. Any inflationary pressures they generate could be mitigated by an increase in interest rates. And they make a compelling case that instead of fretting about inflation, there are good structural reasons for central banks to worry about the prospect of deflation:

[I]n recent years, low inflation rates have proved remarkably resilient, even following round after round of quantitative easing. Three trends explain why. First, technological innovation has driven down consumer prices and globalization has kept wages from rising. Second, the recurring financial panics of the past few decades have encouraged many lower-income economies to increase savings — in the form of currency reserves — as a form of insurance. That means they have been spending far less than they could, starving their economies of investments in such areas as infrastructure and defense, which would provide employment and drive up prices. Finally, throughout the developed world, increased life expectancies have led some private citizens to focus on saving for the longer term (think Japan). As a result, middle-aged adults and the elderly have started spending less on goods and services. These structural roots of today’s low inflation will only strengthen in the coming years, as global competition intensifies, fears of financial crises persist, and populations in Europe and the United States continue to age. If anything, policymakers should be more worried about deflation, which is already troubling the eurozone.

And Blyth and Lonergan appeal to legitimate concerns about the scale of asset purchases by noting that the cash transfers they envision would be modest in comparison:

There is no need, then, for central banks to abandon their traditional focus on keeping demand high and inflation on target. Cash transfers stand a better chance of achieving those goals than do interest-rate shifts and quantitative easing, and at a much lower cost. Because they are more efficient, helicopter drops would require the banks to print much less money. By depositing the funds directly into millions of individual accounts — spurring spending immediately — central bankers wouldn’t need to print quantities of money equivalent to 20 percent of GDP.

Later in their article, Blyth and Lonergan offer an intriguing scheme for debt-financed sovereign wealth funds (SWFs) as an alternative to the global wealth taxation envisioned by Thomas Piketty. Here is where Blyth and Lonergan repeatedly play against type by, for example, warning that “taxes on capital would discourage private investment and innovation” — a banal sentiment, you’d think, yet one that is far from universal among anti-austerians. They reference France’s recent budget problems to suggest that burdening upper-middle class households in the highest income tax brackets “would yield little financial benefit,” another provocative claim in some circles. And they explicitly contrast their call for new SWFs with talismanic, and often intellectually sloppy, calls for increased government-financed infrastructure spending. After noting that “infrastructure spending takes too long to revive an ailing economy,” they insist that infrastructure investments “shouldn’t be rushed” before noting the wastefulness of some infrastructure projects, an aside that came as music to at least my ears. The particulars of these debt-financed SWFs will give some critics pause, and I’d be eager to read a critical take:

[I]nstead of trying to drag down the top, governments could boost the bottom. Central banks could issue debt and use the proceeds to invest in a global equity index, a bundle of diverse investments with a value that rises and falls with the market, which they could hold in sovereign wealth funds. The Bank of England, the European Central Bank, and the Federal Reserve already own assets in excess of 20 percent of their countries’ GDPs, so there is no reason why they could not invest those assets in global equities on behalf of their citizens. After around 15 years, the funds could distribute their equity holdings to the lowest-earning 80 percent of taxpayers. The payments could be made to tax-exempt individual savings accounts, and governments could place simple constraints on how the capital could be used.

For example, beneficiaries could be required to retain the funds as savings or to use them to finance their education, pay off debts, start a business, or invest in a home. Such restrictions would encourage the recipients to think of the transfers as investments in the future rather than as lottery winnings. The goal, moreover, would be to increase wealth at the bottom end of the income distribution over the long run, which would do much to lower inequality.

Here Blyth and Lonergan anticipate the objection that public sector purchases of financial assets risks deepening state control over private firm, an objection that was often raised when politicians contemplated invested Social Security funds in equities, by noting that central banks already have enormous asset portfolios. But then I worry that they might be too sanguine about the long-term consequences:

Best of all, the system would be self-financing. Most governments can now issue debt at a real interest rate of close to zero. If they raised capital that way or liquidated the assets they currently possess, they could enjoy a five percent real rate of return — a conservative estimate, given historical returns and current valuations. Thanks to the effect of compound interest, the profits from these funds could amount to around a 100 percent capital gain after just 15 years. Say a government issued debt equivalent to 20 percent of GDP at a real interest rate of zero and then invested the capital in an index of global equities. After 15 years, it could repay the debt generated and also transfer the excess capital to households. This is not alchemy. It’s a policy that would make the so-called equity risk premium — the excess return that investors receive in exchange for putting their capital at risk — work for everyone.

As we contemplate the aging of developed world populations, technological advances that will continue to put pressure on market wages, and the growing temptation of elected officials to embrace rigid regulations as policy “solutions,” the effort to preserve free and open economies will require new strategies

My main criticism of Blyth and Lonergan is that they ought to have emphasized the role of helicopter drops as an alternative to bank bailouts, a point that Parameswaran emphasized in “A Simple Policy Program for Macroeconomic Resilience” (in which he also usefully differentiates between helicopter drops as tools for macroeconomic stabilization and basic income guarantees, which are conceptually distinct):

In order to promote system resilience and minimise moral hazard, any system of direct transfers must be directed only at individuals and it must be a discretionary policy tool utilised only to mitigate against the risk of systemic crises. The discretionary element is crucial as tail risk protection directed at individuals has minimal moral hazard implications if it is uncertain even to the slightest degree. Transfers must not be directed to corporate entities – even uncertain tail-risk protection provided to corporates will eventually be gamed. The critical difference between individuals and corporates in this regard is the ability of stockholders and creditors to spread their bets across corporate entities and ensure that failure of any one bet has only a limited impact on the individual investors’ finances. In an individual’s case, the risk of failure is by definition concentrated and the uncertain nature of the transfer will ensure that moral hazard implications are minimal. This conception of transfers as a macro-intervention tool is very different from ideas that assume constant, regular transfers or a steady safety net such as an income guarantee, job guarantee or a social credit.

The argument for bank bailouts is that they are necessary to prevent a catastrophic deflationary collapse. Yet direct transfers to individuals can do that just as well, if not better. And so banks can be allowed to fail, clearing the ground for new banks to emerge in their place.  If Blyth and Lonergan are seeking to build a broad coalition for their proposals, and I think they are, pressing the case against bank bailouts would be a good place to start. 

Should We ‘Tape Everything’?



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Last week, I argued that on-duty police officers should be required to record their interactions with civilians with the aid of so-called “body cams” and, more controversially, that teachers should be recorded in the classroom. Though I lumped these two arguments together, they deserve to be teased apart.

First, I should note that I fell prey to technological triumphalism. The “hardware” of body cams can improve our criminal justice system. But what really matters is the cultural ”software” that undergirds the system. 

The case for police body cams is, for the reasons outlined in the column, fairly strong. Yet they’re certainly not a cure-all. As Radley Balko observes, it is not uncommon for police departments to have cameras and to not use them, or for cameras to malfunction at convenient moments:

So in addition to making these videos public record, accessible through public records requests, we also need to ensure that police agencies implement rules requiring officers to actually use the cameras, enforce those rules by disciplining officers when they don’t and ensure that the officers, the agencies that employ them, and prosecutors all take care to preserve footage, even if the footage reflects poorly on officers.

Assuming law enforcement agencies are using recording equipment properly, we then have to deal the problem of “cultural cognition,” which Dan M. Kahan, David A. Hoffman, Donald Braman, Danieli Evans, and Jeffrey J. Rachlinski address in an April 2012 Stanford Law Review article, which Josh Chafetz of Cornell Law School kindly sent my way:

“Cultural cognition” refers to the unconscious influence of individuals’ group commitments on their perceptions of legally consequential facts. We conducted an experiment to assess the impact of cultural cognition on perceptions of facts relevant to distinguishing constitutionally protected “speech” from unprotected “conduct.” Study subjects viewed a video of a political demonstration. Half the subjects believed that the demonstrators were protesting abortion outside of an abortion clinic, and the other half that the demonstrators were protesting the military’s “don’t ask, don’t tell” policy outside a military recruitment center. Subjects of opposing cultural outlooks who were assigned to the same experimental condition (and thus had the same belief about the nature of the protest) disagreed sharply on key “facts”—including whether the protestors obstructed and threatened pedestrians. Subjects also disagreed sharply with those who shared their cultural outlooks but who were assigned to the opposing experimental condition (and hence had a different belief about the nature of the protest). These results supported the study hypotheses about how cultural cognition would affect perceptions pertinent to the speech-conduct distinction. We discuss the significance of the results for constitutional law and liberal principles of self-governance generally.

In a similar vein, it is easy to imagine that jurors reviewing a body cam recording of a police confrontation with a civilian would bring their “cultural cognition” to bear. In a case involving, say, a white police officer and an African American civilian, much could depend (alas) on the racial composition of the jury pool. Alex Tabarrok summarizes the work of Shamena Anwar, Patrick Bayer, and Randi Hjalmarsson on the impact of race on the outcome of criminal trials:

What the authors discover is that all white juries are 16% more likely to convict black defendants than white defendants but the presence of just a single black person in the jury pool equalizes conviction rates by race. The effect is large and remarkably it occurs even when the black person is not picked for the jury. The latter may not seem possible but the authors develop an elegant model of voir dire that shows how using up a veto on a black member of the pool shifts the characteristics of remaining pool members from which the lawyers must pick; that is, a diverse jury pool can make for a more “ideologically” balanced jury even when the jury is not racially balanced.

The author’s results show not only that blacks and whites are treated differently depending on the composition of the jury pool but also that random variation in the jury pool adds to the variability of sentences holding race constant. Like is not treated as like. The results also suggest that we don’t need racial quotas to increase fairness. We can increase fairness and reduce variability in a racially neutrally way by expanding the size of juries. Six-person juries have become common because they are cheap(er) but a return to twelve person juries would reduce the variability of sentences and greatly equalize conviction rates across race. [Emphasis added]

These findings about jury trials reminded me of Russ Roberts’ recent conversation with Barry Weingast, in which Weingast, a student of legal history, described the juries of ancient Athens. These juries were absurdly large by modern standards, with 201 jurors for a trial. These jurors would simply vote on the outcome of a trial after hearing the arguments of the two litigants. The reason for these large juries, according to Weingast, is that the goal of the law was not just to establish rules of conduct, but to establish rules of conduct that allow for the coordination of people’s expectations. And so it is important to understand what are the shared expectations in our society. A small jury could include a handful of eccentrics who don’t have a good handle on societal expectations. A large one, however, would give you a much clearer picture of the expectations of your typical Athenian. Something similar should apply, I would argue, in our own society. Stephanos Bibas’s The Machinery of Criminal Justice reminds us that something similar did apply in colonial America:

Colonial Americans saw criminal justice as a morality play. Victims initiated and often prosecuted their own cases pro se (without lawyers), and defendants often defended themselves pro se. Laymen from the neighborhood sat in judgment as jurors, and even many judges lacked legal training. Trials were very quick, common-sense moral arguments, as victims told their stories and defendants responded without legalese. Communities were small, so gossip flew quickly, informing neighbors of what was going on. Even punishment was a public affair, with gallows and stocks in the town square. True, punishments could be brutal, procedural safeguards were absent, and race, sex, and class biases all clouded the picture. Nonetheless, the colonists had one important asset that we have lost: members of the local community actively participated and literally saw justice done.

The point of jury trials was to empower communities, and to respect their values. In a more diverse society, there is a logic to ensuring that juries reflect this diversity. Among other things, this will tend to strengthen the legitimacy of law enforcement in diverse communities, which, as recent surveys remind us, is at a dangerously low level. As you can probably tell, I’m very interested in this subject and I’d like to revisit it.

On an entirely different note, I oversimplified the issue of recording teachers in their classrooms, as an acquaintance reminded me over email. Such recordings could help establish the facts surrounding disciplinary actions, which does strike me as valuable in itself. Yet the existence of these recordings creates the danger that teachers will be reduced to automatons as they are forced to follow narrow prescriptions as to what they can say and do. I still believe that the recording of teachers could be used as a valuable pedagogical tool, particularly if the recordings are only available to teachers, their colleagues, and their supervisors. But the mere existence of these recordings raises the danger that, for example, litigious parents might demand access to them. 

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Lane Kenworthy on Bettering the Lives of the Poor



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Recently, I asked Lane Kenworthy, professor of sociology at the University of California, San Diego, and author of Progress for the Poor (2011) and Social Democratic America (2013), to answer a few quick questions about what the United States can learn from poverty-fighting efforts in other market democracies, and he was kind enough to agree. Kenworthy is an advocate of a larger, more generous U.S. social safety net, hence his recent call for a “social democratic America.” Yet he is also deeply interested in making U.S. public sector institutions more efficient and responsive, and I’ve long believed that conservatives can profit from his work. I reached out to Kenworthy in part because I believe that the Nordic model, and its reliance on “supports+incentives+pressures,” is misunderstood by at least some of its American admirers. 

Reihan Salam: Much of your work is based on the notion that the United States can learn from the efforts of other affluent market democracies to better the lives of the poor. Across these countries, have rising wages been the chief vehicle for raising incomes at the bottom or has it been rising transfers?

Lane Kenworthy: Since the late 1970s, it has been mainly rising transfers. In most of the rich countries for which there are comparable data, the earnings of low-end households increased little, if at all, during this period. (Ireland and the Netherlands are exceptions.) When incomes rose, it was because of increases in net government transfers — transfers received minus taxes paid.

This owes partly to the characteristics of individuals and households at the low end. Some people have psychological, cognitive, or physical conditions that limit their earnings capability. Some are elderly. Many of these households have just one adult, and family circumstances can impose a significant constraint.

It’s also a function of the economy, which is less conducive to wage increases for low-end workers than it was during the 1950s and 1960s. It’s more difficult to increase productivity in low-end service positions than in manufacturing. Firms now face more intense competition from more sources (foreign and domestic). Companies have more options for replacing workers, whether with machines or with low-cost laborers abroad. In nations like the US, shareholders now pressure management for constant cost-cutting and buoyant quarterly earnings growth rather than steady long-run improvement, and labor unions have weakened.

How do countries increase government transfers? For some programs,benefit levels rise automatically as the economy grows. This happens when, for instance, pensions or unemployment compensation are indexed to average wages. For other programs, such as social assistance, an increase in benefit generosity may require an explicit policy update by a government agency or by the legislature.

In the United States, only one of our main government transfer programs, Social Security, is structured in such a way that benefit levels automatically increase when the economy grows. Social Security retirement benefits are indexed to average wages, so they have tended to rise more or less in concert with GDP. Unemployment benefit levels are determined by state governments. In many instances, the benefit level is a “replacement rate,” which means the payment is a certain fraction of the unemployed person’s former wage or salary. Because real wages in the bottom half of the distribution have not increased in the past several decades, unemployment benefits for Americans in low-wage jobs have failed to keep up with growth in the economy. Other programs, such as the Earned Income Tax Credit, the Supplemental Nutritional Assistance Program (food stamps), Social Security Disability Insurance, and Supplemental Security Income, are indexed to prices. This means they keep up with inflation, but not with economic growth. Temporary Assistance for Needy Families payments are determined by state policymakers; there is no automatic increase, not even for prices. AFDC-TANF benefit levels have fallen steadily in inflation-adjusted terms over the past several decades. As a result, government transfers for low-end households have increased less in the US than in many other affluent countries.

RS: You often reference the distinction between employment-conditional earnings subsidies and unconditional transfers. Given the large numbers of low-income households with low or no earnings, why haven’t governments simply increased unconditional transfers to all low-income households, whether they include working adults or not?

LK: One reason is that most affluent countries face demographic pressure on the public budget. The generation entering retirement is large, so existing commitments to pensions and health care for retirees are going to increase government expenditures in coming decades. Increasing tax rates is a tough sell politically. A more attractive strategy is to increase taxable earnings, and one way to do that is by getting more people into employment. Providing generous unconditional transfers to able working-age adults reduces the incentive for such people to be employed.

A second reason has to do with perceptions of fairness. Many people — not just here in the US but in all rich nations — believe that everyone should pull their own weight to the extent they are able. So they want unconditional benefits to be reserved for the truly needy.

RS: Denmark and Sweden have employment rates that are among the world’s highest, and Sweden recently surpassed the United States in the number of hours worked per working-age adult. Americans tend to think of the Danish and Swedish welfare states as very generous. How do they manage to combine generosity to low-income households with high levels of labor force participation?

LK: The Danish and Swedish welfare states provide strong supports for employment. Most important, good-quality childcare and preschool (“early education”) is widely available at an affordable price. Here in the US, childcare is available, but care that’s affordable often is mediocre in quality. Among mothers whose youngest child is six to sixteen years old, and thus in K-12 schooling, the employment rate in Sweden is similar to that in the US, whereas among mothers with a child under six, it’s 15 percentage points higher in Sweden.

Another helpful support is “active labor market policy,” which is a bundle of programs that aid young people who are struggling to get into the labor market, mid-career or elderly workers who lose their job, and people with various types of constraints and disabilities. The supports include training and retraining, lifelong learning, job placement assistance, and more.

Though government benefits for non-employed Swedes do tend to be fairly generous, the de facto minimum wage (it’s set via collective bargaining rather than by government) is high, so people on the margins of the labor market don’t face strong work disincentives. In the past decade, two new policies have aimed to make the incentives even more favorable for employment. One is an employment-conditional earnings subsidy, similar to our Earned Income Tax Credit. The other is a payroll tax reduction for people employed in certain low-paying service positions.

Along with supports and incentives, Sweden and Denmark often pressure benefit recipients into employment. Because individual circumstances vary so much, this is best done by giving caseworkers considerable discretion to decide which people can be effectively pushed into paid work, when, and with what kind of help. Doing this well requires an investment — in well-trained caseworkers who remain in their jobs and thereby build expertise, in having a sufficient number of caseworkers so that they aren’t overwhelmed with clients, and in ensuring that caseworkers have access to sufficient resources to help their clients enter and remain in the paid workforce (retraining, transportation, temporary housing, treatment for addiction, etc).

I’m not suggesting these two countries have fully solved the problem of how to couple generous government benefits with high employment. I worry, for instance, that their high wage floors and (in Sweden) payroll taxes reduce employment somewhat among immigrants and the young. But overall I think their supports+incentives+pressures approach has proven comparatively effective.

The Case Against Crony Consumerism



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The following is a guest post from Jay Weiser, associate professor of law at Baruch College’s Zicklin School of Business.

Even as critics on the right and left unite against crony capitalism, crony consumerism continues to enjoy widespread support. Two recent articles decrying predatory practices in the financing of consumer durables illustrate the point. “USA Discounters hooks some service members with credit before springing the debt trap,” by Paul Kiel of ProPublica, and “In a Subprime Bubble for Used Cars, Borrowers Pay Sky-High Rates, by Jessica Silver-Greenberg and Michael Corkery of Dealbook, both paint a picture of nefarious businesspeople (who make The Simpsons’ Mr. Burns look like a choirboy) pushing unaffordable credit on dewy-eyed, innocent consumers. This three-hankie narrative more closely resembles a three-card monte game that distracts viewers from what’s going on underneath. 

Wide availability of credit encourages some consumers to overextend, default, and go bankrupt. While Silver-Greenberg and Corkery‘s used car article asserts that fees and high interest rates on subprime used car loans have “generated rich profits for the lenders and those who buy the debt,” firms serving these consumers typically do not make extraordinarily high profits given the high default rates. In his Washington Post piece, ProPublica’s Paul Kiel claims that retailer USA Discounters loads up young servicemembers on overpriced computers and home appliances, hits them with high default interest rates, sues them in a Virginia court remote from where many are based, garnishes their wages, and leaves them at the edge of destitution.

Both articles minimize the consumer role. Silver-Greenberg and Corkery accept at face value borrowers’ claims that they didn’t collude with the loan originators to falsify their income — though one borrower noted that living in the suburbs, “I just can’t get around without my car,” even if he couldn’t afford one (a telling example of how U.S. low density land use policies entrench poverty). 

Kiel’s servicemember interviewees lacked good enough credit to buy from national retailers (even though firms such as Walmart and Amazon offer inexpensive credit to qualified buyers), a problem exacerbated by federal paternalism. Concerned with possible financial ruin for active-duty servicemembers with debt obligations stateside, Congress passed the Servicemembers Civil Relief Act, which is essentially an unfunded mandate on creditors. The SCRA limits interest on active-duty servicemember debts to 6 percent, below market for most consumer debt, and restricts enforcement actions. USA Discounters’ seemingly high prices are actually a finance charge and credit insurance in disguise, raising prices for all customers to cover the anticipated losses from active-duty customers. Similarly, while Kiel criticizes the company’s practice of requiring all litigation to take place in its Virginia home jurisdiction, regardless of the servicemember’s location, he produces no evidence that USA Discounters is collecting unowed debts.  He fails to credit USA Discounters’ argument that, by centralizing collection lawsuits, they can collect more cheaply and thus pass on the savings to their non-defaulting customers.

Both articles are consistent with crony consumerist ideology, which implies that lenders should make cheap credit available regardless of ability to repay. (The federal government, not content with its housing “affordability” push of the Clinton and George W. Bush years, has recently arm-twisted credit agencies to manipulate credit scores upward). If lenders don’t comply, they are sued for discrimination based on racially disparate impact. If they do, they will be attacked for predatory lending or unfair collection practices. Louis Hyman’s book Debtor Nation shows the same forces operating nearly a half-century ago, and post-2008, home mortgage documentation litigation has allowed many defaulted borrowers to remain in their homes free of charge. In crony consumerist ideology, debt is a euphemism for a cash advance with repayment optional — a gift, in layman’s terms. Unfortunately, there is no free lunch: if lenders can’t collect from deadbeats, they have to raise prices for everyone else to cover the losses.

Kiel identifies a real problem with youthful servicemembers, many in their first real jobs, who fail to understand the risks of installment debt. The work of leading financial literacy scholar Annamaria Lusardi provides little comfort: most people, particularly in the servicemembers’ demographic, don’t comprehend even the basics about interest, and studies suggest that financial literacy education has little long-term effect. Given that the military already offers free financial counseling, perhaps it should require mandatory just-in-time counseling before servicemembers enter into financing arrangements involving payroll deduction – and sharply limit the percentage of income subject to payroll deductions.

Incentives are best aligned when the market, rather than politics, allocates risks between borrowers and lenders. Paternalistic efforts to discourage imprudent borrowing will choke off some bad loans while redirecting part of the credit flow into higher-cost channels such as loan sharking. Honest policymaking chooses among the tradeoffs.

Today’s Policy Agenda: Medicare Advantage May Be Worth It



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Even a small percentage of kids not getting vaccinated could resurrect infectious diseases.

At FiveThirtyEight, Emily Oster shows why vaccination rates of 95 percent may not be enough to protect communities against some diseases. Oster reviewed National Immunization Survey results to compare vaccination rates with instances of Pertussis (commonly known as whooping cough), a potentially deadly infection of the lungs common in infants. She found that lower vaccinations rates were correlated with higher infection rates, even when looking at vaccination rates in the 95 to 99 percent range:

But this doesn’t quite add up: Epidemiology suggests that having a 95 percent vaccination rate is enough to keep a disease extremely rare, thanks to something called “herd immunity.” So Oster hypothesizes that the issue is, understandably, that some places within states have worse-than-average vaccination rates, so states with 95 percent vaccination rates overall have, say, more local communities with below 95 percent rates than 99-percent-vaccinated states.

So Oster looked at Pertussis vaccination rates in counties across the state of California, and the differences in infection rates are stark: Infection rates in the counties with vaccination rates of between 77 and 86 percent are about three times higher than rates in counties with at least a 94 percent vaccination rate. And the fact that such places exist even when all U.S. states have objectively high state vaccination rates for Pertussis means that individual vaccinations are still important. Oster summarizes:

For parents, this information would seem to caution against reliance on herd immunity. Yes, if your county (or better, your neighborhood) has a 99 percent vaccination rate, you’re probably safe. But knowing that your state vaccination rate is 95 percent really isn’t enough. For the vast majority of people, there is absolutely no medical reason not to vaccinate, and the idea that there are no benefits is foolish.

The low near 6 percent unemployment rate masks a big problem: underemployment.

Bloomberg’s Jeff Kearnes and Jenna Smialek report that millions of part-time workers are looking for full time work, but can’t find it:

The high share of workers who are part time for economic reasons is one reason that the Labor Department’s broadest measure of unemployment remains far above its 8.8 percent pre-recession level. U6 unemployment, which includes involuntarily part time and discouraged job seekers in addition to the jobless, is 12.2 percent, or almost double the 6.2 percent level of the main unemployment rate. Both increased by 0.1 percentage point in July from five-year lows in June. 

About 7.5 million Americans are working part-time for economic reasons, which is down from a high of over 9 million in March 2010. But before the recession, fewer than 5 million part-time workers were looking for full-time work. The high involuntary unemployment rate indicates that, even with the total unemployment rate at just 6.2 percent, the labor market still has a long way to go in terms of recovery.

Federal Reserve Chief Janet Yellen has said that the Fed will take the involuntary part time employment rate into consideration when deciding when to raise interest rates. Economists currently predict rates will begin rising in the third quarter of next year, reaching 1.13 percent by the end of 2015, but it’s not clear if the underemployment problem will be much better by then.

Medicare Advantage costs more, but it could be a good investment.

At the Upshot, Austin Frakt discusses whether or not Medicare Advantage is a good use of taxpayer money. Medicare Advantage, a private managed-care alternative, costs 6 percent more than traditional Medicare, and the amount of seniors who choose Medicare Advantage plans has nearly tripled since 2005, more than doubling as a share of Medicare beneficiaries:


Studies show, Frakt points out, that Medicare Advantage out performs traditional Medicare on several measures: Patients are more likely to get important vaccinations and various screenings for health problems they’re predispositioned to experience. And, the HMOs that provide Medicare Advantage plans have an incentive to use high-quality providers and provide such services because keeping their enrollees healthy can save them money down the road — and Medicare advantage enrollees tend to stick with their plans.

Is the extra spending on Medicare Advantage actually a good investment? Frakt reports that, for now, some health economists who have researched the topic cautiously say that Medicare Advantage is probably worth it, noting that opposition to its slightly higher upfront costs may be short-sighted. (Moreover, Medicare Advantage, if payments were structured somewhat differently, could cost noticeably less than it does now – for a theoretical and delicious explanation of why that’s the case, Reihan has a cheeseburger analogy here, and James Capretta and Yuval Levin lay out how a Journal of American Medicine Study found such savings.)

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Today’s Policy Agenda: School Autonomy Works



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Why Republicans might need Avikcare.

For Politico, Jennifer Haberkorn looks at how changes on the ground are affecting the politics of Obamacare for Republicans. She writes:

Many House Republicans privately worry that unless they have the 218 votes needed to pass a [health care] bill this fall, it’s futile to put something on the floor only to see it fail and expose them to Democrats’ attacks before the November elections. They insist that full repeal remains a top priority and that they want to pursue a step-by-step replacement plan with such ACA provisions as ensuring coverage for pre-existing conditions and keeping dependents on a parent’s insurance policy until age 26.

Still, the longer it takes Republicans to draft and vote on a plan — if they do it at all — the more daunting their political and policy problems become.

More than 15 million Americans already have coverage under Obamacare — 8 million through the exchanges and more than 7.2 million in Medicaid, according to the Obama administration. While Republicans downplay those numbers, arguing that many of the “newly insured” previously had plans that were eliminated under the law, they admit some people are indeed benefiting . . .

Party leaders say they have to ensure that people who got Obamacare coverage stay covered under an alternative. “There’s no question — we have to,” [Tennessee Republican representative Phil] Roe said. “You have to have a bridge to cover these folks — have a place for them to go to buy insurance.”

Republicans have a challenge: The constituencies Haberkorn and Representative Roe are describing will fight losing their newfound insurance, and the cost of health care and health insurance is at the front of the minds of middle class voters more broadly. So if Republicans did manage to repeal Obamacare, it will have to come along with a replacement plan that addresses many of the concerns Obamacare did in a market-oriented way — something like Jim Capretta’s plan.

However, we’ve now witnessed how challenging it is to pass a sweeping reform of the health-care system. Democrats needed back-to-back landslide wins to take the House, Senate, and White House and still were barely able to ram Obamacare through. Repealing Obamacare without passing an adequate replacement would be a political and policy disaster for Republicans, and even if they did manage to pass something, it likely wouldn’t even touch Medicare.

Enter Avikcare, summarized by the Angeda’s Callie Gable here. The plan uses Obamacare to achieve all of the conservative health-care-policy goals while avoiding many of the political headaches described above — it could be the precursor to a new way to think about health policy on the right.

School autonomy works.

Via Marginal Revolution, Youjin Hahn and coauthors assembled a study comparing private and public schools in South Korea. Hahn et al:

We show that private high school students outperform public high school students in Seoul, South Korea, where secondary school students are randomly assigned into schools within school districts. Both private and public schools in Seoul must admit students randomly assigned to them, charge the same fees, and use the same curricula under the so-called ‘equalization policy’, but private schools enjoy greater autonomy in hiring and other staffing decisions and their principals and teachers face stronger incentives to deliver good students’ performance. Our findings suggest that providing schools greater autonomy in their personnel and resource allocation decisions while keeping school principals accountable can be effective in improving students’ outcomes.

We’ve discussed recently the evidence showing that raising teacher pay without changing the hiring procedures would fail to improve teacher quality. This study, which would seem to relate to the debates we often have over teacher tenure, charter schools, and school vouchers, makes use of a natural experiment with findings that corroborate the call for liberalizing hiring and firing of teachers and for more decentralization and competitive pressures in education.

Since the natural experiment prevents selection effects (e.g., smarter kids going to the better schools) through random assignment and holding costs and curricula equal, the authors feel confident asserting that private schooling causally improves educational outcomes through principals facing more accountability in the form of school boards along with giving them more flexibility in assembling their faculty.

Thom Tillis hits the right note on taxes.

In an interview with Byron York of the Washington Examiner, Thom Tillis discussed his thoughts on tax reform. York’s report:

Tillis supports tax reform, but he distanced himself from the GOP stereotype of prescribing tax cuts for all economic ills. “You can’t lead with the notion that everything gets fixed by just reducing taxes,” he said. “There are a lot of other structural things that we have to do if we’re going to try to create better-paying middle-class jobs, and I think you do that by leading with regulatory reform.” He cited the EPA, plus Dodd-Frank and other strictures on business, as measures he’d like to see loosened.

Tillis is right that, while it would be beneficial for our tax code to be more pro-growth, taxes aren’t stifling the economy like they were in the 1970s. A major tenet of reform conservatism is that conservatives need to respond to the challenges of today rather than just keep advocating for the same policy actions that solved the problems Ronald Reagan faced — Tillis appears, to some extent, to get that.

Is there still slack in the labor market?

Daniel Aaronson and Andrew Jordan of the Chicago Fed have released a new report looking at why the economy has been seeing slow wage growth. They write in their abstract:

The authors find that the share of the labor force that is medium-term unemployed (five to 26 weeks unemployed) and the share working part time (less than 35 hours per week) involuntarily are strongly correlated with real wage growth. Moreover, they estimate that average real wage growth would have been between one-half of a percentage point and a full percentage point higher in June 2014 if 2005–07 labor market conditions had been restored, indicating that the slack in the jobs market still weighs heavily on the real wage prospects of U.S. workers.

In other words, “slack” in the labor market — lots of workers underemployed and lots of people on the margins of the labor force — explains why lower unemployment isn’t pushing up wages. This is a key problem for advocates of further monetary easing: If indeed there’s still significant unused productivity in the economy, keeping interest rates low is probably a good thing that could help heal our labor market and enable those at the bottom of the income ladder to experience gains. But the concern, as expressed by an informal Wall Street Journal poll of economists, is that continued stimulus could lead to the economy overheating, because monetary policy can’t necessarily get marginal workers into the labor force.

For now, though, overheating doesn’t seem like a big risk: The producer price index only rose 0.1 percent in July, and even if we reached an annual rate of 2 percent, inflation wouldn’t be the worst thing for the economy right now.

Today’s Policy Agenda: The VA Is Doing a Lot More Private Referrals



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The budget deficit is 24 percent lower, for now.

In the Wall Street Journal, Eric Morath reports on theTreasury Department’s monthly statement, which said that the total deficit incurred from October to July is 24 percent less that it was  2013 levels. Deficit spending for the month of July came in at around $94 billion, about $2 billion lower than economists expected and 3 percent lower than in July 2013.

The annual deficit peaked in 2009 at $1.4 trillion and has been trending down since — the year-to-date deficit in July was the smallest since the recession began in 2008. Economist think the deficit will shrink again in 2015, but it is expected to begin growing again in 2016:


According to the CBO, health-care spending, Medicare and Social Security benefits for the Baby Boomers, and rising interest rates will drive the deficit increases.

The VA is referring more patients to private providers.

The Associated Press’s Adrain Sainz reports that in the last two months, the Veterans Health Administration referred 25 percent more patients to private providers than during the same period in 2013. Robert McDonald, the new VA secretary, said the system will refer more veterans to private providers until their facilities are able to offer veterans timely care:

“Until we get systems up to capacity, we’re expanding our use of private care and other non-VA health care to improve access for veterans experiencing excessive wait times,” McDonald said. “And we’re monitoring non-VA care to ensure veterans receive the best that they deserve.”

This surge of private provider referrals comes after reports of life threatening wait times and poor quality of care at some VA facilities. Last Thursday, Obama signed a $16 billion dollar VA bill that appropriated specific funds to pay for some veterans to get care in non-VA facilities — there’s an existing Non-VA Care system that will essentially be formalized and expanded.

Obama launches new $250 million dollar pre-K initiative with competitive grants.

Alyson Klein discusses Obama’s new preschool development-grant competition in Education Week. Here’s what government preschool enrollment across the country looked like in 2014:

There will be two separate grant competitions — one to help states without pre-K programs build one and another for states who already have pre-K programs to expand them. Like the Obama administration’s earlier Race to the Top competition for elementary and secondary education, states will compete for funding using a points system based on indicators like levels of teacher training and number of low-income children served.

President Obama proposed a $75 billion dollar “Preschool for All” initiative in his Fiscal Year 2014 budget, which was almost unanimously rejected by both bodies of Congress. This small initiative is intended to spur states to expand pre-K coverage for poorer kids at a much lower cost to the federal government.

Today’s Policy Agenda: The Labor Market Is Getting Better, But Is It Still a Hireless Recovery?



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The labor market keeps getting better — but is it still a hireless recovery?

Josh Mitchell reports in the Wall Street Journal on the newest jobs market indicator showing improvement: job openings. On Tuesday, the Bureau of Labor Statistics released their newest data on openings, and they continue to surge:

This number is yet another positive sign of labor-market recovery, as more firms are finding themselves able to hire. Sensing this shift in demand for labor, more workers believe that they’ll be able to find another good job, hence the rising quit rate. But, in addition to the problem of stagnant wages, one question that remains to be answered is on the supply side: Did bouts of long-term unemployment permanently scar former workers? Are the long-term unemployed returning to work? Ben Casselman explains why that is still an open question.

Immigration is at the front of voters’ minds.

In a new poll released by Gallup today, the border crisis appears to be moving public opinion: Immigration has overtaken the state of the economy as the second most important issue, behind only general dissatisfaction with our government.

While there seems to be public support for legalizing those already in America and the economic case for increasing high-skill immigration is an easy one to make, Reihan has pointed out that the public appears to oppose increasing higher immigration flows much beyond what they are today. With immigration now such an important issue to the voters, a political response is necessary that both recognizes voters’ preferences and can reform the system in a way that could be helpful to the economy and not so hurtful to native low-skill workers, as Reihan and Yuval Levin have laid out.  

Work requirements didn’t leave the poor behind during recessions.

Ron Haskins and others at the Brookings Institution have released three studies in one report focusing on how post-welfare reform programs responded to poor economic conditions. Haskins et al.:

The new report is based on three studies. First, the researchers compared changes in the TANF rolls to increases in Aid to Families with Dependent Children rolls (AFDC – the pre-1996 cash welfare program with weak work requirements) during previous recessions, as well as changes in TANF rolls in relation to state-by-state increases in unemployment. They found that TANF rolls increased more in the recession of 2001 and the Great Recession of 2007 than AFDC did on average during the pre-welfare reform recessions of 1980, 1981 and 1990. In addition, the increase in the TANF rolls was greater when examined during the unique period of rising unemployment in each state (12 and 30 percent respectively under two methods of measuring increases in state unemployment rates) than during the inclusive dates of the official national recession (7 percent), according to the research. . . .

Haskins, Albert, and Howard then used a nationally-representative longitudinal data set to examine how single mothers fared in the three most recent recessions (1990, 2001, 2007-2009), given the increase in the size of this demographic over the last few decades and their high poverty rates. Single mothers were less likely to receive benefits from the TANF program during the 2001 and 2007 recessions compared with the 1990 recession before welfare reform, but they were more likely to have a job and to get other government benefits, including unemployment benefits, Supplemental Nutrition Assistance Program (SNAP, previously known as food stamps), Supplemental Security Income, and tax credits based on work. Overall, a broad measure of income which includes many of these benefits showed that poverty among single mothers and their children was lower during the Great Recession than during the recession of 1990 before welfare reform…

Third, the researchers interviewed state TANF directors, finding that most states did not struggle to pay for growing TANF rolls during the Great Recession, in part because of the Stimulus bill passed by Congress in 2009, and that most directors considered their state’s response to the Great Recession as adequate or better… All in all, the American system of balancing work requirements and welfare benefits worked fairly well, even during the most severe recession since the Depression of the 1930s.

One of the major concerns with the work-requirement model embraced by the Right for welfare reform is that in economic downturns, many would be able to find work and then be left behind by our work-focused safety net. It’s an important consideration – even Ron Haskins himself has wondered, “The issue here is, can you create a strong work program, as we did, without creating a big problem at the bottom?”

But the data don’t seem to support it. In fact, the work of these Brookings scholars suggests that not only were single mothers not left on their own in recessions, but that they actually had significantly lower poverty rates than would be expected under the pre-1996 system. They also found that the new TANF proved to be a reliable safety net by increasing its rolls when times got tough, as we would hope.

Today’s Policy Agenda: Medicaid Is Expanding, Even in States That Didn’t Expand Medicaid



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Medicaid is expanding, even in states that didn’t expand Medicaid.

At the Upshot, Margot Sanger-Katz reports that nearly 1 million residents of states not expanding Medicaid under the ACA have signed up for Medicaid this year (versus the sign-up rates that would be expected):

Medicaid enrollment has also increased this year in many states that chose not to accept federal funds. Data from Medicaid released Friday show that enrollment jumped in most states that did not expand their programs, including Georgia (16 percent), Montana (10 percent), Idaho (9 percent) and Florida (7 percent). Altogether, enrollment in Medicaid and the Children’s Health Insurance Program in the states that didn’t make any changes has gone up by 975,000.

Nearly all states that didn’t expand had some increase in Medicaid enrollment, and a few state’s programs grew significantly. Georgia and Montana both saw double-digit increases, with their enrollments increased by 16 percent and 10 percent, respectively.

This phenomenon is something policy makers call the woodwork effect, which is when people who were previously eligible finally decide to sign up. In this case, the campaigns to encourage people to enroll in Medicaid in expansion states and to enroll in exchange plans have likely raised awareness about Medicaid and caused people to seek benefits.

These new enrollees are present a financial concern for both opt-out and opt-in states. Even states that expanded Medicaid have had a wave of previously eligible people sign up, and states have to pay the same share of the expenses for already-eligible beneficiaries as they did before the expansion (around 40 percent of the cost, while the feds cover about 60 percent, generally, but it varies by state). In addition, states have to cover the administrative costs for all Medicaid enrollees, whether they’re eligible because of the ACA or not.

Jobs are being created, but the new jobs pay less than the ones that were created before the recession.

In Bloomberg Businessweek, Peter Coy discusses a document released Monday by the United State Conference of Mayors, which reported that the average job created during the recent recovery pays 23 percent less annually. 

From early 2010 through mid-2014, while the economy gained a little more than 9 million jobs, the fastest growth came in the low-paying accommodation and food sector; this year the average annual wages in the sector are just under $21,000. Only the fifth-fastest-growing sector since 2010 has been a high payer: professional, scientific, and technical employment, with average annual wages in today’s dollars of about $87,000. For job-gaining sectors as a whole, the weighted average of pay has been just $47,171 a year.

Nearly half of the jobs lost in the 2008 recession were in manufacturing or construction, which are relatively high-paying sectors. Conversely, the most growth during the recovery has come from lower-paying sectors like the food and accommodation industries. Of course, average wages have risen during the recovery, but slowly.

HHS is threatening to cut off Obamacare for thousands of people who haven’t verified their citizenship or immigration status.

In Vox, Sarah Kliff reports that CMS sent final notices requesting proof of legal residence to 310,000 individuals this week. If they do not provide proof of citizenship or legal immigration status by September 5, they will lose their health care coverage on September 30. This map shows the share of letters going to each state:

Floridians and Texans will receive the largest amount of letters, with each state receiving nearly 94,000 and 53,0000 respectively.

According to CMS, there were nearly 1 million cases of problematic immigration status for enrollees in May, and about half of them have been resolved; an additional 210,000 are in the process of being resolved.

Not one person has lost coverage because of his or her immigration status so far, Kliff notes.

Avikcare Explained



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Avik Roy, a senior fellow at the Manhattan Institute and a friend of National Review, released a health-care-reform plan today that complements a range of options offered by conservatives so far to replace Obamacare. But Avik’s plan, as he explains in an NRO piece today, differs somewhat from other GOP proposals because it can leave in place some parts of Obamacare, and uses them to drive a comprehensive reform of the whole American health-care system. The American health-care system overall, he argues, was hardly a free market before Obamacare, but some aspects of the law’s exchanges, for instance, offer a way to transform the whole system into one that works for consumers and saves money.

Here’s how he proposes to do it:

Reform the exchanges to make health care consumer-driven and affordable.

Federal requirements for what plans must cover and at what cost would be significantly loosened, and a laundry list of Obamacare’s new taxes on insurance would be repealed. Roy’s plan changes the structure of Obamacare’s subsidies by benchmarking them to a high-deductible plan with a health-savings account — providing a powerful incentive for people to move into consumer-driven health plans. The HSA would be funded in part (depending on income level) by federal subsidies, which would roll over from year to year, giving consumers incentives to stay healthy and to make cost effective health-care decisions when they do need care. 

Consumer protections like guaranteed issue (people can’t be denied insurance) and lifetime and annual spending limits will remain intact. But insurers will be allowed to charge older individuals more than they do under Obamacare, and charge younger people less. Using a well-respected model from the University of Minnesota, Roy predicts this will ultimately lower the average exchange premium substantially relative to what it will be under Obamacare or the Senate GOP proposal:

Repeal the individual mandate and the employer mandate.

Because the plan should lower the cost of insurance and increase flexibility, it would make purchasing insurance attractive for healthy individuals. Thus, the individual mandate can be done away with (it’s partially replaced by a change to how open enrollment works — individuals will only have the chance to enroll in plans every two years, rather than once a year under Obamacare). Further, the proposal would eliminate the employer mandate, which will move some individuals away from employer coverage and into the exchanges in addition to freeing up the labor market. To push the health-care market further in that direction — away from employer-provided coverage toward consumer-driven options, a longtime conservative goal — Roy’s plan would also put the tax on high-cost plans (the “Cadillac tax”) into effect one year sooner.

Give most Medicaid beneficiaries private plans on the exchanges

The current Medicaid system, as Roy has long argued, produces poor outcomes relative to private insurance, so poor Americans can be helped out a lot by moving most Medicaid beneficiaries into the private insurance market. There are certain aspects of Medicaid that Roy would put entirely on the federally subsidized exchanges and parts of it (e.g., long-term care and policies for the disabled) that Roy would leave to the states. (The system is currently a mess of conflicting state and federal mandates and priorities.) 

Make Medicare a fiscally solvent and consumer-driven program.

Under the plan, the Medicare eligibility age would increase by four months every year until the program is totally phased out, to be replaced by putting seniors on the reformed exchanges. Of course, that means all current seniors can stay on Medicare, but it’s a more rapid, and actually more market-friendly, implementation of the Paul Ryan plan for Medicare.

Over 30 years, the model Roy uses estimates this change would save $5.1 trillion. The plan makes several further reforms to cut costs and to encourage seniors to seek care in the private market. Roy looks at the huge role played by Medicare as one of the fundamental problems of the American health-care system — it has tens of millions of Americans on inefficient single-payer health care already. Right now, seniors can’t even collect their Social Security benefits unless they sign up for Medicare — Avik would put them on the exchanges and encourage employers to offer consumer-driven coverage for them. This would effectively means-test Medicare, reducing spending on the entitlements that are driving the federal government bankrupt (Avik has specific ways to do this with the existing Medicare program too, making Medicare Part D less generous for prosperous seniors, for instance).

Break up hospital monopolies and increase competition among providers.

Hospitals have become increasingly consolidated over the last two decades, eliminating competition and driving up costs:

Roy’s plan would repeal rules and regulations that make building new hospitals difficult and excessively expensive. He also proposes expanding the division of the Federal Trade Commission, which litigates anti-trust suits, that deals with hospital mergers to thwart further anticompetitive activity. To encourage both local and regional competition, Roy proposes using reference pricing to make decisions more market driven and encourage medical tourism (patients seeking care in different localities, states, or countries where it may be less expensive).

Roy’s plan also calls for an end to the Veteran’s Heath Administration, a massive socialized system all its own. Roy proposes giving veterans a federal subsidy to buy care in the exchanges and opening VA hospitals to civilian patients, which would introduce much needed competition into nearby hospital systems.

Make malpractice and medical innovation laws more friendly.

Fear of malpractice suits encourages providers to perform unnecessary tests and procedures, driving up the cost of care. Roy suggests introducing caps on noneconomic and punitive damages and a “fair share” rule, which would ensure malpractice damages reflect the doctor’s share of responsibility.

The high cost of the FDA’s Phase III clinical trials keeps many new drugs, especially those to treat common ailments that will be less profitable, off the market. Roy recommends that some patients be allowed to use drugs that performed well in phases I and II while they undergo phase III testing.

With Avikcare, less is more.

Roy’s plan would significantly improve access to care for the Medicaid population and increases coverage by 12.1 million individuals by 2025 relative to Obamacare:

Even better, Roy’s model, which is similar to the ones the CBO runs, estimates that the plan will reduce the deficit by $8 trillion over the next 30 years – all while lowering private insurance premiums.

The Threat of Health Care Market Consolidation



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Private insurers often play the role of villain in health policy debates. But private insurers are at the mercy of medical providers, particularly those with a great deal of market power. If I’m a private insurer, I have little choice but to play ball with the dominant hospital group or health system in a given region. Because hospitals are obligated to provide care to those who can’t afford to pay for it, governments at all levels have acquiesced as hospitals have consolidated. The idea is that hospitals will use their pricing power for the greater good, to provide uncompensated care and to more broadly serve their communities by, for example, subsidizing the training of medical professionals. It’s not at all clear, however, that this cross-subsidy strategy is the best way to make high-quality medical care more affordable and accessible. Innovative medical providers often find themselves stymied in their efforts to offer low-cost alternatives in regions dominated by politically powerful hospital groups. This in turn means that the cost of medical care, compensated or uncompensated, is higher than would be the case in a more competitive market. 

In theory, the Affordable Care Act was designed to do away with the problem of uncompensated care by dramatically reducing the number of uninsured individuals. With the uncompensated care problem “solved,” there would presumably be less need for the public sector to stand idly by as hospitals consolidate to increase their pricing power. As Chris Pope observes in a new report from the Heritage Foundation, however, the Affordable Care Act has if anything exacerbated the problem of monopoly pricing power in medical care. Yet the story of government’s role in driving provider concentration is not primarily about the Affordable Care Act. The bigger culprit is Medicare, the single-payer health system that represents just over a fifth of all health expenditures in the U.S.

The story behind hospital consolidation is fairly straightforward. Patients strongly prefer medical providers that are close to them. They are shielded from the high cost of care by third-party payment. Local hospitals can thus demand high reimbursement rates from payers in their regions, as customers will revolt if their insurers fail to give them access to name-brand hospitals within easy commuting distance. As hospitals consolidate, their bargaining power over public and private payers steadily increases. 

In a sector dominated by for-profit firms, this bargaining power would translate into higher profits, which government would then be tempted to tax away. But most hospitals are either publicly-owned or they are nonprofit organizations. The high reimbursement rates that flow from bargaining power helps subsidize bloat: more or more generously-compensated staff than is strictly necessary, underutilized facilities, and a lack of spending discipline across the organization, among other things. This bloat is part of motivation for consolidation. Some hospitals are too small or cover too small a region to operate cost-effectively, and Pope explains that mergers of small hospitals have yielded real efficiencies. Mergers of larger hospitals, however, rarely yield significant efficiencies; these mergers do little more than increase pricing power. 

When managed-care organizations (MCOs) gained ground in the 1990s, they used their power to exclude inefficient providers from their networks to hold down costs. Hospital consolidation made it harder for MCOs to exclude a given provider, as it left them with fewer options to choose from. Pope also cites “any willing provider” laws as a restraint on the ability of MCOs to press for efficiency. In the political conflict between MCOs and hospitals, the hospitals had a big advantage: they weren’t evil pencil-pushers trying to deny care; rather, they were your friendly medical provider, always eager to provide it. And when hospitals commanded high reimbursement rates, they insisted that they plowed the money into higher-quality care. According to Pope, the real effect was almost exactly the opposite: the absence of competition meant that high reimbursement rates led to “organizational slack, weaker accountability and performance, and lower-quality care.” Hospitals in regions with little provider competition are less likely to use the best medical equipment and they appear to result in poor health outcomes for heart attack and pneumonia patients. 

Pope warns that regulatory solutions to the problem of hospital consolidation, like more aggressive price controls, will fail because they address the symptoms of hospital consolidation rather than the root causes. (He also points to business models, like ambulatory surgical centers that specialize in certain procedures, that can help drive down costs.) Earlier efforts to contain cost growth through regulation, like state-level certificates of need (CON) laws that regulate hospital capital expenditures (which can determine the number of beds in a facility, its ability to deploy expensive technologies, etc.), over time came to shield dominant hospitals from competition. States that have eliminated CON laws, meanwhile, have seen lower health care cost increases than those that have retained them. 

And so Pope focus on the role of Medicare, which reimburses general hospitals at far higher rates than more efficient ambulatory surgical centers and other independent medical providers. These higher reimbursement rates are justified on the grounds that hospitals care for sicker, older, harder-to-reach patients, but the higher reimbursement rates are not limited to those patients who are in fact sicker, older, and harder to reach. Hospitals are effectively rewarded for underperforming and for spending excessively. When they generate losses by, say, paying inflated prices, they are more likely to receive subsidies for uncompensated care. It is true that hospitals are obligated to provide emergency medical care. Yet emergency rooms can generate substantial revenue for hospitals by accounting for half of inpatient admission. Moreover, the rise of for-profit emergency rooms demonstrates that these services can be provided efficiently. Government-owned and nonprofit hospitals have little incentive to reveal how lucrative these services can be or to run them efficiently. 

In his critique of Obamacare, Pope emphasizes the ways it shields incumbent insurers from competition and prevents new benefit designs from emerging. The law encourages medical providers to organize themselves into Accountable Care Organizations. The goal is to foster productivity-enhancing vertical integration; but Pope maintains that ACOs will also foster horizontal integration that further dampens competition. Independent physicians will face intense pressure to join this integrated organizations as the administrative complexity of operating under Obamacare increases. Overall, I’d say Pope sees Obamacare as playing a fairly limited role in the hospital consolidation story — its failure is that it did so little to reverse the trend, thus belying its claims to remaking the American health system in a way that will eventually yield lower costs and higher quality. 

The heart of Pope’s argument is that sanctioning hospital consolidation and monopoly pricing power as a means of achieving other desirable outcomes, like care for the indigent, is foolish. The government is trusting that hospitals will use revenue from high reimbursement rates to cross-subsidize other desirable services, yet hospitals have generally failed to do so in a coherent or cost-effective way:

Rather than propping up monopolists—and in the process punishing competitors for their relative efficiency—policymakers would better serve their constituents by limiting their interventions to targeted and explicitly funded measures to address specific gaps in the health care delivery system. While the justification offered for subsidizing general hospitals and allowing them to engage in monopolistic practices is a need to extend the provision of care, the result has been to create captive markets that are unresponsive to patients and able to impose unnecessarily inflated prices on the broader community. As a result, taxpayers are often forced to pay several times over for the same supposedly “uncompensated care,” which nonetheless remains inadequately supplied.

Pope ends his report with a series of broad recommendations:

Refuse to prop up monopoly power. Government regulation and spending should not shield dominant providers from competitors. Monopolies are irresponsive to the needs of patients and payers. They are an unreliable method of subsidizing care that tends to both lower quality and inflate costs.

Repeal certificate-of-need laws. Legislative constraints on the construction of additional medical capacity should be repealed. Innovative providers should be allowed to expand or establish new facilities that challenge incumbents with lower prices and better quality.

Subsidize patients, not providers. Public policies should be provider-neutral. Payments should reimburse providers for providing care, period. In particular, publicly funded programs should not operate payment systems designed to keep certain providers in business regardless of the quality, volume, or cost of the treatments they provide. If some individuals are unable to pay for their care, policymakers should subsidize such needy individuals directly.

Allow patients to shop around. Wherever possible governments and employers should put patients in control of the funds expended on their care, and permit them to keep any savings they obtain from seeking out more efficient providers.

Repeal Obamacare and its mandates. Forcing individuals to purchase standardized health insurance establishes a captive market, making it easier for providers, insurers, and regulators to degrade services and inflate costs with impunity. Repealing Obamacare and its purchase mandates is essential to creating a market in which suppliers have the flexibility to respond to consumer demands for better value for their money.

In fairness, one can imagine a reform of Obamacare’s exchanges that would move us in this direction, though it would be a reform so thoroughgoing that most of the law’s Democratic supporters would oppose it.

Reforming the FDA



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Towards the end of his review of Joseph V. Gulfo’s new book Innovation Breakdown, a harrowing first-hand account of how the FDA nearly killed a promising new medical technology, George Mason University economist Alex Tabarrok references Europe’s approach to regulating medical innovation: 

Compare MelaFind’s experience in the U.S. with its reception in Europe: MelaFind was submitted for marketing approval in Europe in May 2011. It was approved just five months later. One key reason for Europe’s efficient approval process is that European governments don’t review medical devices directly. Instead they certify independent “notified bodies” that specialize and compete to review new products. The European system works more quickly than the U.S. system, and there is no evidence that it results in reduced patient safety. Rather than tweak the current system, why doesn’t the U.S. just adopt the European model and call it a day? Our health and our economy would be better off for it.

Henry Miller of the Hoover Institution has advanced a proposal along these lines. Instead of certifying products itself, the FDA would work through approved nongovernmental drug-certifying bodies; pharmaceutical and medical device companies would hire these bodies to evaluate the efficacy of new products, but the FDA would have final say. One obvious concern is that biotech firms might hire unscrupulous, low-cost drug-certifying bodies that do a slapdash job. Yet these bodies would presumably fail to pass muster with the FDA, which would continue to serve as the last line of defense. The desire to hire the cheapest and most compliant drug-certifying bodies would have to be balanced against the desire to hire a body that will get its decisions approved. 

Less controversially, Miller calls for a U.S. commitment to accepting the judgments of select foreign regulatory authorities with strong reputations for protecting the interests of consumers, like those found in the European Union, Canada, and Japan. Both strategies could do much to facilitate innovation in the life sciences. 

A Better Immigration Compromise



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One of the more striking aspects of the immigration reform debate is the simple, important fact about public opinion that it has largely ignored. President Obama and his allies often emphasize that though the Senate immigration bill has been backed by a large majority in the Senate and a broad array of constituencies, from organized labor to the U.S. Chamber of Commerce to various immigrant advocacy organizations, recalcitrant House Republicans stand in the way of comprehensive immigration reform. But this opposition makes more sense when we consider that voters consistently oppose a substantial increase in immigration and the Senate immigration bill will, according to the Congressional Budget Office, substantially increase immigration. Recently, my colleague Callie Gable put together a chart illustrating how public support for increasing immigration, decreasing it, or keeping immigration levels the same has varied since 2001, drawing on Gallup data:

Support for decreasing immigration is consistently much higher than support for increasing it. And though support for increasing immigration has increased over time, it currently stands at 22 percent. If there is a consensus in the U.S. on immigration levels, it appears to be that immigration levels should be kept at present levels. 

It is also true, however, that there is widespread support for legalizing a large share of the unauthorized immigrant population currently residing in the U.S. A Reason-Rupe survey from February of last year found that 55 percent of respondents believed that unauthorized immigrants should eventually be allowed to apply for citizenship once they’ve met certain requirements, 4 percent believed that they should be allowed to stay in the U.S. but not allowed to apply for citizenship, 11 percent believed that they should be allowed to stay temporarily as guest workers before being sent back home, while 27 percent that they should be deported. Democrats are considerably more likely than Republicans to favor some form of legal status for unauthorized immigrants, but large numbers of Republicans back the idea too. Conservative critics of comprehensive immigration reform have tended to focus on the legalization question. I’m sympathetic to these critics. Yet support for legalization is broad and deep enough that opposition to legalization is likely to prove less fruitful than a focus on future immigration levels. 

To understand the Senate immigration bill, it is important to understand the coalition behind it. Among elected officials and policy intellectuals on the right and the left, there is considerable support for increasing skilled immigration, based largely on the premise that that there are spillover benefits associated with having a dense concentration of skilled professionals. The political constituency for increasing skilled immigration, however, is fairly limited. Financial services and technology employers find the idea of expanding the skilled workforce attractive, as it will tend to restrain wage growth for professionals working in these sectors. While these employers are influential, and while they have impressive resources at their disposal, they are geographically concentrated in high-productivity regions, which limits their political reach. The political constituency for increasing less-skilled immigration, in contrast, is more geographically dispersed, as it includes low-wage employers in agriculture, tourism and hospitality, and retail, among other sectors. This dispersion is helpful for advocates of less-skilled immigration, as it means that there are employers who’d palpably benefit from an increase in less-skilled immigration across many different states and congressional districts. This constituency also includes cosmopolitan intellectuals who see increasing less-skilled immigration as a viable strategy for alleviating global poverty, and who discount the costs associated with helping immigrants with limited literacy and numeracy and their children integrate into the American mainstream. The Senate immigration bill unites these constituencies. Those who favor an immigration policy that increases skilled immigration while reducing less-skilled immigration — an eminently sensible approach — find themselves politically weak. It is important to differentiate between skilled and less-skilled immigration: increasing the former while reducing the latter would be close to a free lunch for the American economy, particularly as new labor-saving technologies continue to emerge. 

Organized labor strongly supports the legalization of unauthorized immigrants, yet it is somewhat more skeptical about sharply increasing future immigration. This makes intuitive sense, as unauthorized workers exist on the margins of the economy, where they are vulnerable to the whims of their employers (and where they undercut unionized workers). They are skeptical of guest worker programs that have the potential to give rise to abuse and exploitation of workers, and they favor employment-based visas that give workers wide autonomy over those that give a great deal of power to employers. And at least some thinkers associated with organized labor are serious about reducing future unauthorized immigration flows.* For example, Daniel Costa of the Economic Policy Institute, a labor-aligned left-of-center think tank, has addressed the importance of building effective employer verification systems. Though organized labor backs the Senate bill, they could be allies in an effort to build an immigration reform alternative that legalizes much of the unauthorized population while holding future immigration levels steady. 

If we wanted to increase employment-based immigration without also increasing overall immigration levels, in keeping with public opinion, one logical approach would be to limit family reunification, e.g., limiting the extent to which extended family members would be eligible for family-sponsored admissions. The Senate bill does narrow family reunification to a modest degree by eliminating family-sponsored admissions for siblings and adult married children of U.S. citizens over the age of 30, but it could go further in this direction by, for example, setting stronger expectations for self-support. Immigrants sponsoring relatives could, for example, be obligated to post substantial assimilation bonds to help ensure that their relatives don’t become financially dependent. But measures of this kind would likely run afoul of foreign-born citizens, a large constituency with a strong interest in immigration policy. Those Americans who favor a less permissive approach are less likely to be engaged in immigration policy debates, and so their wishes are discounted. 

In the new National Review, Yuval Levin and I outline an approach to immigration reform that is more respectful of the public’s wishes while also seeking to address the many ways the immigration status quo serves the country poorly. Suffice it to say, I think that the compromise we propose is far superior to the Senate bill, and my hope is that conservatives and moderates will engage with it. Right now, the article is available to subscribers only, but it should be available to all comers soon. 

* I’ve revised this sentence to clarify that while the organized labor movement as a whole takes a “cosmopolitan” position on immigration, , as Yuval and I specify in our recent article, there are elements within the labor coalition that might be open to a new approach. 

Immigration Reform Is Not the Key to the Latino Vote



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Will GOP support for immigration reform convince low-income Latino voters to favor Republicans, who are skeptical about increasing redistribution, over Democrats, who are enthusiastic about doing so? Lynn Vavreck, a political scientist at UCLA, discusses the Republican failure to win Latino votes in The Upshot without ever mentioning the fact that Latino households tend to earn substantially less than U.S. households as a whole. She instead focuses on immigration policy. Drawing on data from Latino Decisions, a polling firm, she argues that to win Latino voters, Republicans must champion immigration reform:

Latino Decisions calls immigration a “gateway issue” for Latinos and the Republican Party. According to their data, nearly two-thirds of registered Latino voters say they would be willing to listen to Republicans on other issues if they stopped promoting deportation policies, like defunding DACA. But to get their attention, immigration overhaul must be part of the call.

While I’m sure that Latino Decisions is scrupulously objective on the subject of immigration reform (its survey was sponsored by the Center for American Progress Action Fund), there are other data points that are worthy of note, e.g., that Latino voters consistently identify education and jobs and the economy as more important issues than immigration. To be sure, this is consistent with the notion that immigration really is a “gateway issue.” But Vavreck should acknowledge that many Latino voters explicitly state that they consider immigration reform to be a lower priority issue that other issues that speak more directly to their near-term economic prospects.

Moreover, Republican candidates tend to fare better among high-income voters than low-income voters. The American Community survey estimates that the median household income in the U.S. was $58,328 as of 2012. The Latino median household income was $44,401 while the non-Hispanic white median household income was $68,530. This isn’t the sole explanation for why Republicans fare better among non-Hispanic whites than Latinos, to be sure, and there are groups (Jewish voters, Asian American voters) with median household incomes that are substantially higher than that of non-Hispanic whites yet which nevertheless vote Democratic in large numbers. Latino voters do not appear to adhere to this pattern. As Sean Trende of RealClearPolitics has observed, Latino voters were more Republican relative to the country as a whole in the presidential election of 2012 than they were in the presidential elections of 1972, 1976, 1984, 1988, and 1996. What explains Republican success among Latino voters in 2000 and 2004? One could attribute relatively high Latino support for the GOP in 2000 and 2004 to George W. Bush’s enthusiastic support for immigration reform. It is also true, however, that Latino household wealth was increasing in this era while it sharply decreased in the wake of the housing bust. When Latinos felt prosperous, they might have been more open to a Republican economic message that places an emphasis on self-reliance and asset ownership. Conversely, the bust might have contributed to a sense of economic vulnerability among Latino voters, which in turn inclined them to be more supportive of candidates backing an increase in transfers to low-income households and debt relief. 

Vavreck rests her analysis on the following finding:

Latino registered voters were more likely to say they would consider voting for Mr. Ryan in 2016 if they heard the first statement ["we should welcome anyone who is committed to America"] — 47 percent said they would consider voting for him. When they heard only the “rule of law” statement ["we believe in the need to have better security on our border"], just a third said they would do so.

To be clear, the share of Latino voters who would consider voting for Ryan increases by 14 percentage points. Note that the question isn’t presented in binary fashion, i.e., these voters are being asked if they’d consider voting for Ryan in isolation, without any consideration as to whether Ryan might have a Democratic opponent in this notional presidential election (I assume he would) or what this Democratic opponent might say about immigration policy. Vavreck also ignores the possibility that there might be some other set of issues that might increase the share of Latino voters who would consider voting for a Republican candidate. For example, low- and moderate-income Latino voters might be more inclined to back Ryan if he favored a large expansion of the child credit, a policy that Democrats might have a difficult time matching in light of their competing domestic policy priorities. 

Vavreck concludes on the following note:

The Republican Party can compete with Democrats for the votes of Latinos, even young Latinos, without alienating the majority of its voters. But to earn support from this fast-growing segment of the American population, these survey results suggest the party is going to need leaders and candidates strong enough to stand up to the few who have hijacked its policy on immigration.

Given the fact that the Senate bill will sharply increase immigration in the coming years despite the overwhelming opposition of the broader electorate to such an increase, it seems more plausible to suggest that it is the Republicans who favor the Senate bill who have attempted to hijack the party’s policy on immigration and have failed to do so. 

A more promising approach for wooing Latino voters, I would suggest, would be for Republicans to offer an economic agenda that is more appealing to middle-income voters. An immigration policy that, like those of Canada, Australia, and Switzerland, tends to increase incomes at the low end of the income distribution somewhat while decreasing them modestly for those at the high end of the distribution would be entirely compatible with that approach. 

Today’s Policy Agenda: Ex-Im Can’t be Justified on Economic-Growth Grounds



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The Export-Import Bank can’t be justified on economic growth grounds.

One of the most interesting policy debates of the summer has concerned the reauthorization of the Export-Import bank, the federal government’s credit agency that provides subsidized financing to U.S.-based exporters. Economist Salim Furth from the Heritage Foundation explored the program’s effects on economic growth in a review of the research literature on export subsidies. Furth:

However, ample research by academic economists found that in most cases, export subsidies reduce the total income of the country paying the subsidies. In all cases, export subsidies reduce global income, and benefits accrue only to those who are subsidized—at the expense of other exporters and taxpayers.

While the Ex-Im bank’s subsidy isn’t large – as Tony Fratto has pointed out, on a cash basis it actually returned money to the Treasury in 2013 – a strong case has been made against the program on fairness grounds, that the government shouldn’t be picking winners and losers in the economy instead of letting the market decide. Further, this kind of distortion can have an economic impact when it acts as just one more advantage for incumbent, established firms in fending off upstart competitors.

Maybe it’s worth our while to assist United States companies to gain market share in emerging markets or to use the subsidies to pursue foreign-policy objectives, but congressmen will have to consider that economic research suggests that it doesn’t help our economy as a whole.

Labor-force changes are about more than demographics.

The Economist’s graph of the day looks at the rates of employment growth in the recovery across different age groups.

We’ve discussed before how the scary drop in labor-force participation throughout the recovery can partly be explained by our population getting older and retiring, but that only explains about half of the drop. This graph is what the other half looks like: Prime-age workers, who should be at the peak of their working lives, have seen little job growth coming out of the recession.

Joni Ernst makes sense on the minimum wage.

In an interview for Hot Air, Republican Iowa Senate candidate Joni Ernst discussed what she thinks about the minimum wage:

Hot Air: “Bruce Braley has recently been making the case that you oppose a federally mandated minimum wage. Just to clarify for our readers, what is your position on the minimum wage, either federally or at the state level?”

Joni Ernst: “I grew up working for the minimum wage at Hardee’s and knows firsthand how important the minimum wage is. I support a state based minimum wage so every state can set their own minimum wage based on their cost of living. . What’s right for New York or California, is not necessarily right for Iowa.”

While I’m not particularly sympathetic to the minimum wage in any context, it makes terrific political and policy sense to set minimum wages at the state level. As Jared Bernstein has argued before, state minimum wages would be less problematic than federal floors because of the dramatic differences in price levels between states. According to Bernstein’s calculations, a minimum wage based on half of an area’s median wage adjusted for cost of living would vary from as much as nearly $12 in New York to $8.66 in St. Louis. This disparity can have a severe distortionary impact on the economies with lower price levels if a national wage floor is set, but minimum wages set at the state level could be more responsive both to the policy preferences of the residents and to the economic climate in a given state.

Poverty can’t be solved by one-size fits all solutions.

For the Washington Post’s new narrative/policy journalism outlet the Storyline, Lydia DePillis looks at a homeless shelter/rehabilitation clinic in Colorado that’s having success with the most challenging to treat of the Denver homeless.

“The problem with this population is it’s decades and decades and decades, and it’s all they know. It’s a long way into the woods and it’s a long way out,” says James Ginsburg, the program’s director, who commutes in from Denver. Society thinks “you should go 30 days and you’re done. But we don’t tell that to diabetics.” . . .

In its length of treatment and isolation, Fort Lyon is something of a unicorn. The trend in homeless services over the past decade has been to house people as quickly as possible in the cities where they live, so they can have a stable place to recover while still immersed in the real world. That approach, called “housing first,” doesn’t require people to go substance free immediately in exchange for a shelter. It’s gained traction all over the country and an endorsement from the White House; some federal grants are now tied to whether cities use the model.

Fort Lyon, by contrast, looks like a throwback to the dark days of warehousing the homeless and mentally ill in institutions, where they wouldn’t bother urban dwellers. And yes, it’s convenient for cities that don’t know what to do with their most intractable cases.

But for that subset of the homeless population, it might be the only thing that can help: The place is remote, but also resolutely drug free. . . .

“Like most things, the pendulum swung the opposite direction,” says Ginsburg, who considers himself a strong Housing First proponent. “It’s not all or nothing. This idea that everybody has to be in housing first, everybody has to be treated in vivo, is ridiculous. Housing First is sort of our biggest adversary, because it’s not Housing First. This is housing ready.” By preparing people to re-enter society through vocational education and extended treatment, the logic goes, they’ll be more successful when they finally do get their own place.

While it’s hard to take much in the way of lessons from the experience of the homeless – a distinct subset of the poor that face particular challenges, especially mental illness – and apply them to the broader population relying on the safety net, it does seem that there are implications from DePillis’s powerful reporting to the poverty debate being had after Paul Ryan’s recent federal poverty proposal. First, as Ryan recognizes, different populations have completely different needs. By empowering caseworkers to tailor individualized plans, Ryan’s proposal acknowledges that some individuals could benefit from just simple payments with a work requirement attached, while others need much more comprehensive guidance and support to reach self-sufficiency. James Ginsburg of the shelter in Colorado profiled above is right to argue that one type of treatment or aid will not be sufficient to address every person’s challenges.

Second, Ginsburg notes that the path out of this kind of entrenched poverty is a long one, and therefore, it will be an expensive exercise to employ the case managers and give them the resources they need to help these populations in the way Ryan envisions. Conservatives supporting a comprehensive approach will have to understand they’re going in for a difficult and costly process. 

Today’s Policy Agenda: Consumers Choose Cheaper Health Care Providers if They See the Prices



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Okay, so the Obama administration probably is going to do something about tax inversions.

Bloomberg’s Richard Rubin reports that the Treasury Department is considering taking a unilateral action to limit companies’ ability to use a tax-avoidance practice called inversion. In an inversion, essentially, a company moves its legal address to a country with friendlier tax codes or regulations while still performing most of its business operations in the U.S.

This practice is becoming more and more common, especially among large companies:

Treasury Secretary Jacob Lew said a few weeks ago that regulating inversions was outside the purview of the Treasury Department and that only Congress could only enact such regulations. However, Obama said Wednesday that the Treasury Department would “as quickly as possible” to curb the practice, so we’ll have to see what they try.

Americans might be better health-care consumers if they knew the costs of care

In the New York Times, Elisabeth Rosenthal discusses a HealthCore study that indicates price transparency — just knowing what procedures cost, in other words — could lead some patients to choose more cost-efficient options for medical tests. In the study, the insurer WellPoint gave patients a list of lower-cost providers for MRIs and then asked them if they would like to reschedule their current appointment with a provider who offers a better value. The results were encouraging:

The program resulted in a $220 cost reduction (18.7 percent) per test over the course of two years, said Andrea DeVries, the director of payer and provider research at HealthCore, a subsidiary of WellPoint, which conducted the study#…#Better still, Dr. Nussbaum said, the exercise in price transparency had a ripple effect: Hospitals in areas with the program lowered their prices too, because “they were beginning to lose patient referrals.”

Because more expensive providers had to compete with lower prices to keep business, in other words, the cost of an MRI decreased across the board in areas where WellPoint conducted the study.

Patients may be more cost conscious than doctors: An earlier WellPoint study gave doctors the same type of cost information, but most doctors continued referring patients to more expensive providers and prices stayed the same.

These results are encouraging because they indicate that Americans are certainly capable of becoming more-active and savvier consumers of healthcare, a change that could seriously help control costs

Inequality may be bad, but extremely high tax rates are worse.

Michael Schuyler from the conservative Tax Foundation recently crunched the numbers for the economic theory laid out French economist Thomas Piketty’s bestselling book Capital in the Twenty-First Century. Piketty argues that to combat inequality the top income tax rate for the United States should be 80 percent, and that income over $200,000 should be taxed at 50 or 60 percent.

Schuyler found that after the economy adjusts to the higher tax rates, there would be fewer jobs, GDP would shrink, and capital stock would be significantly reduced:

While the higher rates, in theory, leave 90 percent of taxpayers untouched, the new burden on the rich would be passed down to lower-income Americans. Schuyler estimates that poor and middle-class incomes would drop by more than 3 percent. In the long term, increased tax revenues from the upper class won’t be high enough to fill that gap with social programs like Piketty imagines.

The Coming Private Transit Revolution



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Politico’s Byron Tau and Kevin Robillard report that politicians, and particularly Republican politicians, are trying to associate themselves with Uber and other sharing services that have fought local regulators and incumbent industries to better meet the needs of consumers. Many on the right, myself included, see Uber as a vivid illustration of how “strangling regulations” and “unnecessary red tape” can stymie the emergence of innovative business models. I would go further. Consumer protection, the chief justification for the regulation of taxi services, is baked into Uber’s business model, as drivers and passengers rate each other, and Uber doesn’t allow drivers who fall below a certain rating to make use of the service while drivers have the discretion to not pick up passengers who’ve been deemed abusive or otherwise problematic by other drivers. Uber doesn’t just illustrate how excessive regulation retards innovation — it illustrates how new business models can render certain (not all) regulations obsolete.

Yet as David Schleicher of George Mason University School of Law has observed, there is good reason to believe that Uber is just the tip of the iceberg. In a forthcoming article, Schleicher explores a number of ways local governments might move from resisting the rise of sharing services to leveraging them to achieve various public policy goals. 

One intriguing new development is the rise of new sharing services that are designed to further lower the cost of smartphone-enabled car-hailing and ride-sharing by facilitating the sharing of rides by strangers taking similar routes. SuperShuttle is a business that has long provided shared rides to the airports of major cities; by grouping together passengers, it can offer a cheaper, albeit less convenient ride, to a fixed destination. It is easy to see how this might have been challenging in an earlier era when computing power was expensive, and SuperShuttle had no choice but to engage in painstaking route-planning; fortunately, this process was greatly simplified by having a fixed destination. Now, however, the price of computing power has collapsed, and sharing services have the tools at their disposal to group together passengers traveling to a many different destinations. 

And so Uber is releasing UberPool, which pairs riders with strangers traveling along a similar route. Lyft’s new Lyft Line service does something very similar, albeit more ambitious, as Ryan Lawler of TechCrunch reports:

For Lyft users in San Francisco, Lyft Line will appear as yet another option users can toggle between when trying to hail a ride. When chosen, passengers select their starting point and end point, and the number of passengers they’ll be riding with. The app actually tells passengers the cost of the ride upfront, and Lyft says that fares could be as low as 60 percent off depending on where someone starts or is going.

Once a ride is confirmed, Lyft sends a car while trying to match up another passenger heading in the same direction. The belief is that it will be able to do so fairly often — according to Lyft CEO Logan Green, about 90 percent of all Lyfts requested today have a nearby passenger heading in the same general direction within five minutes.

When a Lyft picks a user up, the expectation will be that the passenger is at their front door, ready to go — no lollygagging. The reason for that is pretty obvious: The shared ride service is dependent on passengers being on time to make it work, otherwise everyone’s late and frustrated and grumpy. Drivers will wait for up to a minute for a passenger, but after that will move along to the next stop.

Over time, one can imagine services like UberPool and Lyft Line evolving into a sophisticated paratransit system that greatly reduces demand for private automobile ownership in dense cities. One is reminded of Helsinki’s initiative to reinvent public mass transit as a universal payment platform that would connect users to a wide range of mobility services, public and private.

Another start-up, Chariot, is not technically a sharing service. Rather, it is a fairly straightforward competitor for public transit. The service offers van and bus service along two heavily-traveled routes frequently traversed by affluent San Francisco office workers. Rides are more expensive than those offered by San Francisco’s (notoriously poor) public transit service, but less expensive than taking an Uber solo. Modern American city-dwellers forget that private transit services were once the norm in U.S. cities, and one assumes that there will be over-the-top opposition to Chariot on the grounds that, say, it will skim affluent passengers from public transit, ignoring the possibility that it might instead reduce the number of people who drive to work or that it might make public transit more attractive by easing congestion, both on the roads and on public transit vehicles, thus making rides faster and more pleasant. I don’t know if Chariot will be successful or not. I will say, however, that it is very exciting that mobility within cities has become, at long last, a space for business model innovation — a development that will make America’s big cities more livable. This is a very good thing indeed, and conservatives have good reason to celebrate it. 

A Ryan Poverty Plan Skeptic: W.’s Faith-Based Organization Chief



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Representative Paul Ryan’s Opportunity Grant proposal, party of the sweeping new anti-poverty plan he announced a couple weeks ago, may be equal parts policy solution and policy problem. The “OG” is essentially a block grant that would allow states to combine the funding they currently get for a range of anti-poverty programs (cash welfare, food stamps, heating assistance, etc.) and design their own plans to accomplish the same goals, pending the feds’ approval and subject to ongoing oversight and assessment. (Ryan’s plan also includes reforms for the EITC, prison sentences, education, and more.)

In the plan, Ryan, the chairman of the House Budget Committee, sets out a vision for how an OG might work: Local and community providers will administer a large portion of the aid that the federal government currently controls, and could pair beneficiaries with caseworkers, who would take an active role in meeting beneficiaries’ needs and setting up contracts that would require certain accomplishments in exchange for benefits. But John Dilulio, who served as the director of the White House Office of Faith-Based and Community Initiatives during the Bush administration, thinks this approach may not work nearly as well as imagined.

In theory, pointed, individualized aid and distribution through community providers is a great idea. But transferring much of the aid-administering capacity of the federal government to states (where, it’s worth noting, a lot of such authority already resides) and then ultimately to private organizations crafting individual contracts could create an administrative nightmare and cause government swell even more, making it harder to produce and measure results.

Dilulio, a Democrat, left his post at the Bush White House in 2001 after just six months, disillusioned by what he felt was the administration’s lack of interest in enacting reforms that fit the bill of Bush’s promised compassionate conservatism. Dilulio said he considered 2001’s Community Solutions Act a political maneuver that reflected none of the “actual empirical evidence that recommended policies promoting greater public/private partnerships involving community-serving religious organizations.”

Eleven years after leaving the White House, Dilulio argued in a National Affairs essay that emphasizing community partnerships and state responsibility can simply make government bigger, and likely less capable, than ever:

This . . . attitude has yielded an even bigger state than we likely would have if Americans had simply and openly approved a large and ever-expanding government. . . . The use of sub-national civil servants, private contractors, and non-profit grantees to carry out federal laws — a practice surely intended to restrain the size of government — has instead inflated the state and given rise to four sets of perverse, if unintended, consequences.

Discussing Ryan’s plan with NRO, Dilulio said it’s unlikely that the states can administer these programs more effectively than the federal government. “If you look at the history of this last half century,” he said, “to date, these promises have never come true. They have never come to fruition, under Democrats or Republicans.”

One of the ideas behind Ryan’s proposal is that states can better meet the needs of certain communities, demographic groups, or localities by contracting with community providers. Dilulio says religious groups and other nonprofits do have latent capacity to do this type of work, but the devil is in the details.

One major problem arises when trying to effectively evaluate the outcomes of these providers, which could need varying success metrics and require unique oversight. This persists at the federal level, since each state would work with the federal government to craft its own goals and be assessed in its own ways. Without uniform standards, which wouldn’t make sense, it would be difficult to ensure that aid is distributed equally across the country or to compare outcomes of different states and different communities. (Ryan has, however, proposed a new center for evidence-based policy making, and promises to support rigorous research on whatever new methods states come up with — randomized trials within states, for instance, could be possible.)

Who would be charged with oversight and measurement? Ryan says there would be third-party assessments, but Dilulio suggests it would likely be left to an army of state and federal bureaucrats — individuals and agencies who all have their own interests and agendas.

And devolving functions would also increase the layers of bureaucracy and costs involved, Dilulio suggests. He mentions Pennsylvania’s Summer Food Service Program, a federal program intended to replace the nutrition kids get during the school year from free or subsidized lunches, to illustrate how complicated tracking aid and its impacts can be. The program is funded through the U.S. Department of Agriculture, which gives the money to the state of Pennsylvania, which then distributes the money to three major cities in Pennsylvania, which pass it on to Pennsylvania school systems, which give it to individual schools, which then work with any number of local providers.

This money changes hands five times before finally being translated into lunches for kids. And after that, it’s hard to be sure that the community providers are using the funds efficiently and providing a quality service. That’s just one, ancillary program.

But successful outcomes from approaches like the Opportunity Grant are not impossible, Dilulio says. He thinks Ryan should offer more specific ideas for how to run the OG better than previous attempts to devolve and privatize programs. “Behind 73 pages, do Representative Ryan or his staff have a plan for translating old ideas into new and better form?” he asks.

For now, the answer seems to be no, understandably – Ryan’s plan is only an outline, and the Opportunity Grant is one piece, albeit a big one, of a much larger plan. As the proposal moves forward and Ryan shakes out the details, it may become clearer if he has plans for how to make local and private aid delivery more feasible than it has been in the past.

The Extraordinary Political Logic of ‘Stealth Amnesty’



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Greg Sargent of the Washington Post interviews John Sandweg, who served as acting general counsel at the Department of Homeland Security from 2012-2013, a period during which the Obama administration established its Deferred Action for Childhood Arrivals (DACA) program. The interview is revealing. According to Sandweg, granting deferred action to a broad class of unauthorized immigrants is all about making the best use of limited enforcement resources. When Sargents asks Sandweg if moving from an internal memo concerning how enforcement resources will be deployed to a public announcement makes some difference, Sandweg insists that it makes no difference at all. Moreover, he claims that granting work authorization to unauthorized immigrants is an afterthought:

Longstanding law already allows for individuals who are granted deferred action to gain work authorization. This is not central to how and why a policy like DACA makes sense. We were looking for a tool to help our officers and agents to better do their jobs. The easiest way to effectuate that was granting deferred action. There was a longstanding, preexisting regulation that governs who gets work authorization; deferred action recipients were included in that regulation — a decision that was made long before this administration.

Sargent then asks David Leopold of the American Immigration Lawyers Association to expand on Sandweg’s analysis, and Leopold adds the following on what DACA actually grants unauthorized immigrants:

While it is true that DACA applies to categories, it does not cross over into anything even remotely equivalent to granting any category any kind of new protection under rewritten law, because it does not create any new right or legal immigration status. The government retains its authority to unilaterally revoke DACA, either categorically or individually, at any time and for any reason, subjecting an undocumented immigrant to removal.

It is true that there is no bright line test delineating the parameters of the President’s authority to grant Deferred Action. Perhaps one way to think about this is to ask whether the exercise of prosecutorial discretion in question — whether categorical or not — can reasonably be seen as legitimate prioritization of limited law enforcement resources. If so, it arguably falls well within President’s legal authority. This would include individual as well as categorical grants of deferred action, such as DACA. As the Supreme Court recognized in Arizona vs. U.S., some “discretionary decisions involve policy choices.” [Emphasis added]

When asked about work authorization, Leopold writes:

Though many argue that DACA grants its beneficiaries work status, in fact, the regulation that grants work status to undocumented immigrants who have been granted deferred action predates DACA and applies to many other categories of people granted deferred action. The federal regulations governing employment under immigration law existed well before DACA. Under those regulations, any undocumented immigrant granted deferred action — under programs that preceded DACA or coincide with it — had already been able to apply for employment authorization. It requires them to demonstrate economic necessity. That applied to anyone granted deferred action either individually or categorically.

And so the fact that deferred action is now being applied to millions of individuals is immaterial, as no new right or legal immigration status is being conferred. The fact that work authorization makes an enormous material difference in the lives of immigrants means nothing, as these authorizations are being granted on an entirely contingent basis. In the world of Sandweg and Leopold, political considerations are irrelevant. The fact that many immigrants will interpret deferred action as an indication that they can deepen their ties in the United States is irrelevant. Unauthorized immigrants granted work authorization will find new economic opportunities that might not have been available to them in the absence of their new (contingent) legal status, and the revocation of this new status will presumably cause considerable economic disruption. This means nothing. The practical, real-world consequences of giving immigrants safe harbor are ignored, as some future president can, in theory, reverse deferred action — Sandweg and Leopold aren’t asked to address the fact that revoking this new contingent status will be virtually impossible, and more difficult after two or three years of the new deferred action policy pass. Will unauthorized immigrants granted deferred action marry and reproduce? More of them will be thus become the relatives of U.S. citizens. Will they enter into economic relationships with U.S. citizens? More U.S. citizens will experience economic hardship, loosely defined, if they leave. 

Sargent’s conversation brings to mind Texas Congressman Lamar Smith’s 2011 HALT Act, a bill that aimed to limit the executive branch’s prosecutorial discretion to prevent its abuse. Reading criticisms of the HALT Act from 2011, before DACA, makes for amusing, and depressing, reading, as many defenders of DACA and the new initiative to (effectively) legalize millions of unauthorized immigrants then claimed that Smith was imagining things. Consider the following from Marshall Fitz of the Center for American Progress:

Legislation to hinder the “temptations” of another branch of government is a bizarre concept, and the suggestion that the administration is “tempted” to legalize the undocumented population is disconnected from reality.

First, the president can’t “legalize” undocumented immigrants. The most he can do is delay their removal from the country for compelling reasons. Second, this administration has deported more immigrants than any administration in a generation. So there’s some cognitive dissonance when immigration restrictionists continue to claim that the Department of Homeland Security, or DHS, refuses to enforce the law and is pursuing a stealth amnesty agenda. More disturbing than the deluded rationale for this bill, however, are the legislation’s intended effects. If the HALT Act became law, it would eliminate the last few crumbs of compassion that remain in the immigration code.

The most obvious symptom of our broken immigration system is the fact that we have 11 million undocumented people who are living here and are working and integrated into our communities. The president has correctly said on numerous occasions that everyone bears some blame for this situation: the immigrants themselves, of course, but also the businesses and families that hire them and the government’s prior inability to regulate the border and worksites. But we can’t enforce our way to a solution. And as we try to do so, the human casualties pile up: The lives of hundreds of thousands of U.S. citizens, legal permanent residents, and undocumented immigrants have been destroyed by our inability to get this right.

In the meantime, one of the few saving graces to prevent even more harm and hardship to U.S. families is the existence of narrow categories of discretionary relief still available to DHS. For instance, when DHS determines that an undocumented immigrant has been here for more than 10 years, has been a person of good moral character, and their removal would cause “exceptional and extremely unusual hardship” to their U.S. citizen spouse, the immigration law authorizes the agency to cancel the removal of that person. The HALT Act would foreclose that and similarly narrow avenues for relief.

The authors and supporters of the HALT Act, however, are wedded to a fantasy that undocumented immigrants will up and leave the country if we make life harsh enough and treat immigrants and their families shabbily enough. This bill’s goal of scrubbing all discretionary relief out of the immigration system is mean spirited and counterproductive. Blinded by anti-immigrant zeal, their efforts to handcuff DHS will make us less safe. It will be harder for our agents to effectively prioritize the removal of gang members over hard-working mothers and children.

What exactly might a stealth amnesty agenda look like? If my goal were to push for a broad amnesty, and I found that there was intense congressional resistance to legislation designed to legalize the unauthorized population by statute, my stealth amnesty agenda might involve using the executive branch’s prosecutorial discretion in such a way as to make future efforts to remove large numbers of unauthorized immigrants extremely difficult by, for example, encouraging unauthorized immigrants to believe that remaining in the United States unlawfully is a viable option, as they will be granted work authorization that will make them full economic participants in American life (a privilege that aspiring immigrants around the world are desperate to gain). And by explicitly telling them that they will not, for a period of several years, be removed from the United States, particularly if they form strong family ties. 

Fitz refers to “narrow categories of discretionary relief,” and he references the concept of “exceptional and extremely unusual hardship.” Is it meaningfully to describe avenues for discretionary relief as “narrow” if they apply to millions of individuals? 

And is it indeed true that in the absence of DACA and measures like it that publicly announce that immigration laws will not be enforced by people who below to several expansive categories actually make it more difficult to prioritize the removal of gang members over hard-working mothers and children? This seems less than plausible, and I’d be curious to hear someone make a detailed case as to how the absence of such a public announcement (as opposed to an internal memo, which is likely to be interpreted differently by unauthorized immigrants themselves) has crippled immigration enforcement efforts.

After describing the HALT Act’s provisions, Fitz 2011 analysis continues to emphasize the narrowness of discretionary relief:

The narrow forms of relief that the HALT Act suspends are Congress’s recognition that in certain circumstances the equities of an individual case outweigh a rule of general applicability. Congress, in those narrowly defined instances, has authorized immigration authorities to evaluate the circumstances of a case and make a decision as to whether relief should be granted. Providing narrowly tailored exceptions to a general rule is an acknowledgment that rigid adherence to the rule may subvert other values and the interests of justice. This bill sacrifices those values at the altar of an ideological agenda. [Emphasis added]

Fitz then reiterates his argument that only by “providing deferred action to low-enforcement-priority individuals” can we have effective law enforcement. What I find confusing about this line of thinking is that the executive branch has not found it necessary to grant deferred action to low-enforcement-priority individuals with regards to drug trafficking, yet law enforcement agencies are nevertheless capable of prioritizing some investigations over others.

Regardless, it seems clear to me that Lamar Smith deserves credit for anticipating the transformation of deferred action from a tool of prosecutorial discretion to a tool designed to politically constrain future policymakers.

I’ll close with a passage from Josh Blackman, author of a new working paper on “Congressional Intransigence and Executive Power”:

Imagine if President Romney, relying on the same sort of power exercised by President Obama, had delayed the Affordable Care Act’s individual and employer mandates indefinitely, until there were enough votes to repeal it. Or if President Rand Paul decides not to enforce the corporate income tax against successful Fortune 500 companies, citing similar prosecutorial discretion relied on in DACA. Or if President Hillary Clinton decides to waive the requirement that welfare recipients participate in the workforce to receive benefits. Or if President Ted Cruz, in keeping with the President’s decision not to enforce controlled substance laws in two states, decides not to prosecute Texas businesses for violations of environmental laws. Or if President Elizabeth Warren decides that the government will no longer collect any interest on federally-guaranteed student loans, waiving any enforcement against defaulting debtors. Or if President Rick Perry determines that based his discretion under the naturalization powers, he can decide to halt all naturalization of people from certain Latin American countries. Or if President George W. Bush had instructed his Social Security Department to not collect a certain percentage of social security taxes, allowing people to deposit the funds directly into individual accounts. I could go on, but you get the picture. In the wrong hands, through the suspension of the laws, the Executive, emboldened by creative lawyers, can enact policies that could never be passed through the legislative process.

Suffice it to say, you can expect immigration activists of the very near future to campaign on the notion that because a future Republican president will strip unauthorized immigrants of their (contingent) protected status, all those who love immigrants must do everything in their power to prevent a GOP victory. There’s an extraordinary political logic at work: either you pass an amnesty through the legislative process, and swell the ranks of voters who owe their legal status to elected officials who believe that unauthorized immigrants should be granted a path to citizenship ahead of lawful aspiring immigrants who’ve chosen not to violate U.S. immigration laws, or you create a class of millions of people who depend on the success of political candidates who are committed to continuing their (contingent) protected status. Heads you win, tails you lose.

But of course politics never enters into the picture here. Not at all. 

Today’s Policy Update: Fewer Companies Are Starting, Brookings Thinks This Is a Big Problem



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U.S. companies are getting older on average, a Brookings report finds, and they think it’s a problem.

In the Wall Street Journal, Asma Ghribi reports on a Brookings Institute report showing that the rate of new business growth in the U.S. has been shrinking for three decades:

The share of firms older than 16 years has increased by eleven percentage points over the last 20 years, and those firms employ an ever-growing proportion of the workforce. And it seems that as existing firms increase their influence, new companies struggle to compete and survive. In every sector, the amount of companies that failed after their first year was significantly higher in 2011 than 1991.

The Brookings authors argue that new, young companies are necessary for innovation and growth, and old companies are keeping newcomers out of the market, a combination that would be detrimental to economic growth.

Did pot legalization really make Colorado’s roads safer? Probably not.

In the Washington PostRadely Balko points out that traffic fatalities in Colorado are for 2014 are lower than they have been on average since 2002, and closer to the lowest rates in the last ten years than the highest ones:

Fatalities in the last two years have been below average and have dropped a bit, but they’re not way below average, so Balko’s suggestion that low fatality rates may have something to do with legalization seems like a stretch.

There is evidence of how that would work: One study found marijuana legalization to be associated with an 8 to 11 percent decrease in traffic fatalities. This could be because people are more likely to use marijuana in their homes instead of in public places from which they have to drive home, or because people substitute alcohol use with marijuana use. Marijuana use has been shown to have minimal detrimental effects on driving ability, so it doesn’t seem like it should matter much either way in the debate.

One way for patients to lower health costs: bargain in an online marketplace.

Kaiser’s Sandra G. Boodman reports on Medibid, a new health-care business that helps patients get much lower prices for some services by allowing providers to bid online to perform the procedures:

To Medibid founder Ralph Weber, a benefits consultant who said he left his native Canada for the United States in 2005 to escape “socialized health care,” using the Internet to arrange non-emergency medical care is long overdue. Americans, he says, are increasingly going online to book travel and even find a mate. Medibid enables them to strip away the opacity that surrounds health-care pricing, Weber maintains, where charges vary wildly even in the same market and can be nearly impossible for consumers to obtain.

“We introduce transparency and also competition,” said Weber, whose company is based in Murfreesboro, Tenn. “We are a disruptive innovation, a free-market alternative to Obamacare.” Weber said that about 120,000 consumers — Medibid calls them “seekers” — have used the service. Many are uninsured, holders of high-deductible plans or enrollees in faith-based plans, which have grown as a conservative alternative to the Affordable Care Act. Seekers are charged $25 for each request or about $60 for an unlimited number of requests per year.

Medibid could be increasingly important as health costs continue to rise and the Affordable Care Act pushes more customers into high-deductible plans, where they’re more conscious about the prices they pay. Goodman reports that the service allowed one patient to receive a knee replacement for just $7,500, which is just half of the lowest price he could find through a typical provider.

To help patients make informed choices, Medibid sends patients their doctor’s license number, which allows patients to find reviews and records for their doctor online. Some members of the medical community, though, still worry that patients won’t get quality care, and insurers are likely to oppose the rise of services like Medibid. It’s not hard to see how there will soon be a move to regulate it out of existence.

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