Tag Archives: Washington Post

Distinguishing between Medicaid Expenditures and Health Outcomes

As the LA Times reports, the Obama administration has vowed not to approve any cuts to Medicaid during budget negotiations:

Preserving Medicaid funding became even more crucial to the Obama administration after the Supreme Court ruled last summer that states were not required to expand their Medicaid coverage. Administration officials are working hard to convince states to expand and do not want any federal funding cuts that could discourage governors from implementing the law.

“There is a big irony,” said Ron Pollack, executive director of Washington-based Families USA, a leading Medicaid advocate. “The fact that the Supreme Court undermined the Medicaid expansion is now resulting in greater support and a deeper commitment to making sure the program is not cut back.”

Paying for Medicaid remains a major challenge for states. The program has been jointly funded by states and the federal government since it was created. And many states, including California, Illinois and New York, have had to make painful cutbacks in recent years to balance their budgets by reducing physician fees and paring benefits, such as dental care.

However, protecting Medicaid spending — without changing incentives for the healthcare industry or patients — does not necessarily mean improved health outcomes for beneficiaries. As of 2011, nearly one-third of doctors said that they would not accept new Medicaid patients because they are losing money on those who they do see, indicating not only a lower quality of care for Medicaid patients compared to those on private insurance, but reduced access to care. Under the current Medicaid structure, states are incentivized to spend more to receive larger federal matching funds grants, but at the same time federal requirements limit opportunities to improve quality of care through innovation.

The State Health Flexibility Act proposed by Representative Todd Rokita (R-IN) proposes a way to change these incentives. Under the State Health Flexibility Act, state funding for Medicaid and the Children’s Health Insurance Program would be capped at current spending levels. At the same time, states would be released from many federal Medicaid mandates and instead would have the flexibility to determine eligibility and benefits at the state level. Rokita proposed this bill last year, and parts of the bill made it into the House budget.

While this bill seems unlikely to make any progress under the current administration, it mirrors reforms proposed by at least one democratic state governor. Oregon’s Governor John Kitzhaber, a former emergency room doctor, received a Medicaid waiver in 2011 to receive a one-time $1.9 billion payment from the federal government to close the state’s Medicaid funding gap. In exchange, he promised to repay this money if the state failed to keep Medicaid costs growth at a rate two-percent below the rest of the country. Kitzhaber sought to achieve this by allowing local knowledge to guide cost savings. The Washington Post reports:

Oregon divided the state into 15 region and gave each one a set amount to care for each patient. These regions can divvy their dollars however they please, so long as patients hit certain quality metrics, like ensuring that adolescents get well-care visits and that steps are taken to control high blood pressure.

The hope is that each of the 15 regions, known as coordinated care organizations, will invest only in the most cost-effective health care. A behavioral health worker who can prevent emergency admissions becomes a lot more valuable, the thinking goes, when Medicaid funding is limited.

While the Oregon plan is not a block grant — the federal government has not capped the amount that it will provide to the state — it does share some similarities with the State Health Flexibility Act. The state and its designated regions have a strong incentive to provide their Medicaid recipients better health outcomes at lower costs because if they fail the state will have to repay $1.9 billion to the federal government. Additionally, the state and the regions have the freedom to find cost savings at the level of patients and hospitals, which isn’t possible under federal requirements.

A government that hands out privileges can expect corruption

According to the Washington Post, the mafia is heavily involved in Italy’s renewable energy market. This is not particularly surprising given that firms in that market compete on a manifestly uneven playing field.

The Godfather Movie in TextIn a market characterized by a genuinely level playing field—one in which no firm or industry benefits from government-granted privilege—the only way to profit is to offer something of value to customers. If you fail to create value for voluntarily paying customers, they won’t volunteer their money. It’s that simple.

But things are different when the playing field can be tilted through government-granted privileges. This is because when the playing field can be tilted, firms have an incentive to find some way to persuade the government to tilt it their way. And the most persuasive techniques aren’t always above board.

The problem is that objective standards for playing favorites are hard to come by. This can corrupt even well-intentioned programs that privilege particular behavior in the name of serving the general good.

Imagine you are a politician and you want to reward firms that specialize in renewable energy. How do you determine who makes the cut? What if you want to reward companies that securitize mortgages for low-income households. How do you decide whom to reward? Or say you want to bailout “systemically important” banks. Where do you draw the line between systemically important and systemically unimportant?

Without objective guideposts, subjective factors loom large: whom do you interact with the most? Whom have you known the longest? Which firms share your ideological perspective? Which are headquartered in your hometown?

Even the most well-intentioned of politicians are susceptible to these considerations because all humans are susceptible to these considerations. That’s why a slew of research has found government-granted privileges are often associated with corruption. For example, in an examination of 450 firms in 35 countries, economists Mara Faccio, Ronald Masulis, and John McConnell found that politically connected firms are more likely to be bailed out than non-connected firms. It’s possible that more deserving firms just happen to be politically connected, but this strains credulity. A more plausible explanation is that in the absence of an objective standard for dispensing privileges, politicians reward those they know.

And when that is the case, firms make it their business to get to know politicians. Just ask Angelo Mozilo, the politically ensconced former head of Countrywide Financial. Countrywide supplied the loans that were repackaged by the federally backed Fannie Mae. And since Countrywide’s business model depended on the favor of politicians, Mozilo made sure he was in good standing with his benefactors. Under a program known internally as the “Friends of Angelo” program, Countrywide offered favorable mortgage financing to the likes of Senate Banking Committee Chairman Christopher Dodd and Senate Budget Committee Chairman Kent Conrad.

The conventional route to profit is to please one’s customers. But when firms are able to profit by pleasing politicians, they will do whatever it takes to please politicians. Which brings us back to Italy and renewables. The current investigation (known as operation Eolo after the Greek god of wind) first bore fruit in 2010 when eight people were arrested for bribing officials with cash and luxury cars. Armed with more evidence, officials have now arrested another dozen crime bosses.

It is good, of course, to have police who investigate these matters. But a far simpler, equitable, and efficient solution is to create a truly level playing field for business. When politicians cannot tilt the playing field in favor of particular firms or industries, businesses have nothing to gain from bribery and connections.

Put away the honey jar and you won’t have an ant problem.

Is Government the Solution?

It was thus salutary that Douglas Elmendorf, the widely respected director of the Congressional Budget Office, told a congressional hearing last week that 80 percent of economic experts surveyed by the University of Chicago’s Booth School of Business agreed that the stimulus got the unemployment rate lower at the end of 2010 than it would have been otherwise.

That’s E.J. Dionne writing in today’s Washington Post. This sort of statement is all too common: “There is consensus on stimulus. All economists agree it is unquestionably beneficial. If anything, the 2009 stimulus was too small. Case closed. Move along.” This is not a fair representation of the scientific view of stimulus.

Let’s start with the Booth School survey. Every week, the Booth School’s Initiative on Global Markets polls an ideologically diverse group of about 40 economists on a particular issue. The surveys are fascinating; I read them every week. On February 15, they put two statements to the panel and asked them to respond. The first statement reads:

Because of the American Recovery and Reinvestment Act of 2009, the U.S. unemployment rate was lower at the end of 2010 than it would have been without the stimulus bill.

It is true that, of those surveyed, 51 percent agreed and 29 percent strongly agreed with this statement. Some of the comments from those who agreed with this statement are telling. Anil Kashyap of Chicago for example wrote, “But this is an incredibly low bar.” And Darrell Duffie of Stanford wrote, “Subsidizing employment leads employment to go up, other things equal. Adverse impacts through growth incentives might take time.” These statements (and others) suggest that perhaps the question was overly-narrow.

Thankfully, IGM probed further. They asked the economists to weigh in on a second statement:

Taking into account all of the ARRA’s economic consequences — including the economic costs of raising taxes to pay for the spending, its effects on future spending, and any other likely future effects — the benefits of the stimulus will end up exceeding its costs.

This time, when the economists were asked about the longer-run, total effects of stimulus, they were much more equivocal. Less than half agreed or strongly agreed with the statement, 27 percent were uncertain, and the rest either disagreed or had no opinion. A number of respondents noted the uncertainties involved. Nancy Stokey of Chicago summed it up nicely, writing, “How can anyone imagine this question is answerable, given the current state of economic science?”

Amen. In my testimony last February before the House Education and Workforce Committee, I wrote:

There are many things on which economists agree (e.g., few dispute the merits of free trade or the long-run fiscal problems with our largest entitlement programs). Unfortunately, there is very little consensus among economists on government’s ability to jumpstart a sick economy.

The degree of disagreement over stimulus is evident when you look at the literature on the “government purchases multiplier.” The multiplier measures the amount by which an economy expands when the government increases its purchases of goods and services by $1.00. If the multiplier is larger than 1, it means that government purchases multiply or stimulate private sector economic activity. If it is between 0 and 1, it means that purchases displace or crowd out private sector economic activity. And if it is less than 0, it means that government purchases crowd out enough private sector economic activity to offset any increase in public sector activity.

In my testimony, I showed the following sample of recent estimates. Each bar shows the high and low-end estimate of a particular study.

As I wrote in February:

Note that there is a wide range in the estimates both across and within studies. If the optimistic scenarios are correct, an additional $1.00 in deficit-financed government spending spurs $2.70 in new private sector economic activity. But if the less-optimistic scenarios are correct, then an additional $1.00 in spending destroys $3.80 in private sector activity.

This misses some of the recent data. In a recent paper Valerie Ramey of UCSD, for example, uses: “a variety of identification methods and samples,” and finds that “in most cases private spending falls significantly in response to an increase in government spending.” She finds that while government spending does bring down the unemployment rate, “virtually all of the effect is through an increase in government employment.” Note that this is entirely consistent with the first IGM statement. In other words, one can believe that stimulus harms the private sector and is costly in the long run, but still think that it might have boosted (government) employment for a time. This is hardly a ringing endorsement of stimulus.

For more on this topic, see Garett Jones’s excellent (February) post here or Veronique’s post here.


Addendum: Vero responds to Dionne’s column, adding links to lots more research on when multipliers might be large or small. And Russ weighs in here, calling for more humility. Read and bookmark both posts.

The Economy as an Ecosystem

On Wednesday I testified before the Senate Committee on Small Business and Entrepreneurship. The title of the hearing was “Perspectives from the Entrepreneurial Ecosystem: Creating Jobs and Growing Businesses through Entrepreneurship.”

It was a less-formal type of hearing than I have done before. There were lots of witnesses, no formal oral statements, and we could more or less raise our placards whenever we wanted to talk.

In my one-minute introduction, I noted that George Mason University came to national prominence in 1986 when James Buchanan won the Nobel Prize here for his pioneering work in public choice. (Vernon Smith, another active researcher in the field of public choice, would become Mason’s second Nobel laureate in 2002). I then said:

Public choice focuses on the ways in which government policies are actually determined and carried out. And I think this weighs on entrepreneurship, in particular. I, too, appreciate the ecological metaphor. I think it is a really appropriate metaphor. Recently, I’ve been looking at the public choice ways in which the ecology of entrepreneurship can sometimes be interfered with. Just like a natural ecology, entrepreneurial ecologies need to be a bottom-up process. And quite often can be subject to interference from governments.

I was pleased that the Committee’s chairwoman, Senator Landrieu (D-LA) largely agreed with me. Channeling her inner-Hayek, she replied:

That is an excellent point and I hope that we’ll have a little bit more of thought provoking comments about that. Just like governments can ruin physical infrastructure—I mean physical and natural environments—governments can also, with the wrong policies, disrupt the… I don’t know if you’d call it ‘natural,’…but the strength, the dormant strength or natural strength of a people to grow jobs and produce wealth.

Unfortunately, not all of her comments were so Hayekian. Another of the witnesses was tech-entrepreneur-turned-academic, Vivek Wadhwa. Today he wrote about the hearing in the Washington Post:

Government leaders — at least some of those present — actually seemed to believe they could, through legislation and spending, increase entrepreneurship and innovation. They asked questions such as: What legislation can we enact to build innovation ecosystems, facilitate mentorship, and teach entrepreneurship? They didn’t seem to understand that these are things entrepreneurs do—not governments.

I couldn’t agree more.

Big Bank Profits and Government Intervention

Zachary Goldfarb had an interesting piece in the Washington Post this week. He writes:

President Obama has called people who work on Wall Street “fat-cat bankers,” and his reelection campaign has sought to harness public frustration with Wall Street. Financial executives retort that the president’s pursuit of financial regulations is punitive and that new rules may be “holding us back.”

But both sides face an inconvenient fact: During Obama’s tenure, Wall Street has roared back, even as the broader economy has struggled.…Wall Street firms — independent companies and the securities-trading arms of banks — are doing even better. They earned more in the first 21/ 2 years of the Obama administration than they did during the eight years of the George W. Bush administration, industry data show.…

Behind this turnaround, in significant measure, are government policies that helped the financial sector avert collapse and then gave financial firms huge benefits on the path to recovery. For example, the federal government invested hundreds of billions of taxpayer dollars in banks — low-cost money that the firms used for high-yielding investments on which they made big profits.

Later, Goldfarb was interviewed on NPR. Near the end of the interview, he says:

But the president has also refrained from taking some of the toughest actions that some economists and outside analysts would like him to have taken. For example, forcing banks or attempting to force banks to forgive the debts of homeowners, or partially forgive the debts of homeowners, or forcing banks to break up into pieces and end, definitively, the too-big-to-fail problem.

So in a sense, Obama has tried to strike a middle ground, harnessing frustration, sharing in frustration of the public regarding the financial sector, but not taking the fundamental actions that would radically restructure the financial industry and perhaps cause there to be more fairness across the country when it comes to the disparate treatment of Wall Street and the rest of the country.

In my view, a “middle ground” would be to a) not bail out banks, and b) not break them up or force them to forgive debts. Instead, the conventional wisdom holds that the moderate position is to a) bail out private firms and then b) force their hands.

The Backdoor Bailouts

The Washington Post reports:

States that have borrowed billions of dollars from the federal government to cover the soaring cost of unemployment benefits would get immediate relief from the Obama administration under a plan to suspend interest payments for the next two years.

According to White House Press Secretary Robert Gibbs, the President’s proposal, “prevents future state bailouts, because in the future, states are going to have to rationalize what they offer and how they pay for it.” I’m not convinced.

First, a little background:

The unemployment system is jointly administered by the states and the federal government. To finance the program, both states and the feds tax the first $7,000 of wages paid to each worker, while some states choose to tax income earned beyond that first $7,000.

As the Post reports:

In tough times, states routinely borrow from the federal government to pay benefits. But when states have an outstanding balance for at least two years, federal law triggers an automatic increase in the federal tax to repay the loan. Such tax hikes already have taken effect or are imminent in Michigan, Indiana and South Carolina.

What the Post doesn’t mention (but Bloomberg does), is: “From 2009 until this year, the loans had been interest-free under a provision of the economic-stimulus program.”

Now the President wants to go further, suspending any interest payments the states owe to the federal government for the next two years. In 2014, he would then change the tax base so that instead of taxing the first $7,000 of wages, the feds and the states would each tax the first $15,000. 

It is this aspect of the proposal that the press secretary, evidently, believes “prevents future state bailouts.” This might be true if we assume that policy makers won’t respond to the extra tax revenue by increasing spending. But more fundamentally, it seems to me that the press secretary is glossing over the fact that the first part of the plan—suspension of interest payments—is a bailout.

For historical context, I turned to Robert Inman. In the first chapter of Fiscal Decentralization and the Challenge of Hard Budget Constraints, he writes (p. 57):

The first major wave of lower government defaults occurred during the 1840s, when eight states (Arkansas, Illinois, Indiana, Louisiana, Maryland, Michigan, Mississippi, and Pennsylvania) and the Territory of Florida defaulted.

Maryland Representative William Cost Johnson (you can’t make that name up!) led the effort. As Inman explains, the rest of Congress didn’t agree with Mr. Cost; they refused to bail out the states (p. 57):

Importantly, opponents of a bailout stressed the strategic implications of such a policy; bailouts would signal an accommodating central government and encourage future deficits, defaults, and ultimately inefficient local governments. Congress said no, and there have been no state defaults since.

This marked a turning point in federal-state relations: through recessions, depressions and countless state fiscal crises, the strong no-bailout rule has survived nearly two centuries.

This made the US federal system unique. Unlike local governments in other countries, US states could not run up huge bills and export the costs to their neighbors. As Inman explains, other countries are not so fortunate to have such a strong no-bailout rule (p. 35):

The recent financial crises in Argentina and Brazil, largely precipitated by excessive local government borrowing, are prominent recent examples of how a fiscally irresponsible local sector can impose significant economic costs on a national economy.

The strong no-bailout rule in the US, however, has not prevented the federal government from increasing its role in state finance. Over the years, federal grants to state governments have steadily grown. Now, there are over 1,120 federal programs that are designed to aid the states. Today, federal funding now pays for nearly 1/3rd of all state spending.

What I find particularly alarming, however, is the recent growth in ad hoc state aid programs that are designed to offset short-term fiscal crunches. To me, these look an awful lot like bailouts. Consider the $135 billion in state aid in the stimulus which included:

  • A state fiscal stabilization fund designed to shore up deficits
  • A temporary increase in the federal Medicaid matching formula (FMAP)
  • Grants for various local projects from teachers to firefighters to police
  • The aforementioned interest-free loans for unemployment insurance
  • And much more

On top of that, the President successfully lobbied for an extension of the “temporary” FMAP increase and an extension of the federal-state unemployment insurance program (he was less-successful in last summer’s attempt to wrangle another $50 billion in state and local aid).

If somehow they could see this, I suspect that the senators and representatives who stopped a state bailout over 170 years ago might wonder if their “no bailout” stance really still stands.

Shovel Ready or Not

Last week, I opined that too-often, economic debates are characterized as a simplistic “markets work” vs. “markets don’t work” debate. This, I said, misses the point that even if markets don’t work, one must determine whether or not government is capable of improving on the situation. Public choice economics, I believe, is a powerful tool to answer that question (often the answer is “no; government cannot improve the situation”). 

In a similar vein, I (and others) have wondered whether the problems with the stimulus might have more to do with government’s inability to wisely spend than with any flaw in the Keynesian logic. 

Now, the president, it seems, is coming around to my view. In an interview with the New York Times Magazine, the president wondered whether:

He realized too late that “there’s no such thing as shovel-ready projects” when it comes to public works.

Remember, all resources that the government spends are borrowed or taxed out of the private economy. The Keynesian story relies on the idea that—during a recession—these resources aren’t doing anything productive in the private economy anyway (they are “idle”). So, according to Keynesians, it is okay for government to remove these resources from the private economy and put them to work. But in order for this to be a net positive, government must know how to effectively put these resources to more-productive use than the private sector would have. It must know:

  • Which spending items provide the most value to people, and
  • How to effectively deliver this value

But unlike private businesses, the government cannot rely on the price mechanism to help discern what people value. Since it doesn’t actually sell anything, the government cannot rely on consumer-feedback and consumer-price sensitivity to determine whether what it is doing is valuable. Instead, responsible governments must undertake time-consuming “cost-benefit” analyses to guestimate which “shovel-ready” projects are worthy and which are just pork.

So here is the rub: stimulus spending is only effective if it is timely and targeted toward high-valued projects. But by its very nature, government cannot determine which projects are high-valued in a timely manner. We can get timely, or high-value. But as Eileen told the Washington Post in February of 2009, “you can’t have both.”

Unemployment Insurance and Unemployment Spells

There was an odd article about the latest Nobelists in the Washington Post today. Jeannine Aversa, Louise Nordstrom and Karl Ritter write:

Some Republicans argue that extending unemployment benefits – as Congress has done on multiple occasions since the recession – can actually make unemployment worse by taking away the incentives to finding work. Liberal economists dismiss that.

The article goes on to rightly take Senator Richard Shelby (R-AL) to task for claiming that one of the Nobelists, Peter Diamond, is unqualified to serve on the Federal Reserve.

Then, a few paragraphs from the end, we learn:

Taken together, [the Nobelists’] work has suggested, for instance, that unemployment benefits can have the unintended consequences of prolonging unemployment. That’s because the aid can make it less costly to be out of work – even as it improves employers’ chances of finding the right workers, as Diamond’s research concluded.

Diamond wrote that workers “become more selective in the jobs they accept” because of the employment aid. In the long run, he found, that makes for better matches and increases the economy’s efficiency because companies and workers are better suited to one another.

But I thought only Republicans believed that unemployment benefits prolong periods of unemployment?

Here is how I might have characterized it:

Some Republicans argue that extending unemployment benefits – as Congress has done on multiple occasions since the recession – can actually make unemployment worse by taking away the incentives to finding work. This is a standard result in labor economics, one that is supported by the left-leaning economists who won the Nobel Prize on Monday. But not everyone thinks this is a bad thing. Diamond, for one, has argued that while unemployment benefits may extend the period of unemployment, they may result in better matches, increasing the economy’s efficiency.   

Can Government Put Idle Resources to Good Use?

“Big chunk of economic stimulus yet to be spent by state, local governments”

This is according to the Washington Post. They write:

The $862 billion package was divided roughly in thirds among tax cuts, aid to states and the unemployed, and investments in infrastructure, health care and other areas. The first two have delivered most of their boost, but much of the investment spending is moving far more slowly. At the end of July, nearly 18 months after the stimulus passed, more than half of the $275 billion in investments had yet to be spent.

Meanwhile, from up in Alaska, I read that that state is slated to receive a piece of the new state aid passed last week, despite the fact that it doesn’t seem to need it:

Alaska is eligible to receive $23.5 million dollars of the $10 billion total, according to the U.S. Department of Education. Alaska’s allocation comes despite a healthy revenue surplus this year that has allowed the state to actually increase school funding.

So money is not being spent that should be spent; meanwhile, other money is being spent that shouldn’t be. Stimulus defenders will say that any time a big organization spends a lot of money, mistakes are bound to be made. And they are right. But I would argue that these sorts of mistakes are far more likely when the organization in question is the government.

Remember the Keynesian story: remove idle resources from the private sector, put them to work, and the economy will grow (provided government borrowing doesn’t crowd-out valuable private investments and provided consumers don’t hold back in anticipation of future tax increases). But the whole Keynesian idea rests on the notion that governments can effectively put resources to higher-valued use than the private sector. This requires government to know what is and is not valuable; to know when and where to spend the money; and to know that – had it been borrowed by someone else in the private sector – the money wouldn’t have been put to better use. Moreover, government has to do all of this without the benefit of the signals that help the private sector allocate resources: no profits, no losses, (almost) no price mechanism.