Posted by on April 7, 2015

Even a Blind Pig

Prepare yourselves for a wave of self-congratulations from Democrats on Obamacare.

Politicians are experts at taking underserved credit.  Bill Clinton, for example, still enjoys an aura of economic wisdom because he happened to preside over the bounce-back from the 1991 recession, the lead up to the “dot-com” bubble and the middle-innings of the credit boom that ultimately created the financial crisis.  The Clinton team probably could have, if they had pursued sufficiently bad policies, derailed these positive trends, but they no more created them than Al Gore was responsible for the internet.

The growth of health care costs has decreased sharply since 2008.  The absolute numbers depend on which data you take, but the trend is clear: the rate of increase has dropped by about 50%.  Much of this is clearly related to the financial crisis, which is obvious from the timing of the decline (which pre-dated the passage of Obamacare by two years and its implementation by even more time); detailed econometric studies, as reported in the Economist, attribute something between 1/3 and 2/3 of the slowing to the recession.  But supporters of Obamacare point to the failure of inflation to re-accelerate in the recovery – such as it is – as proof of the effectiveness of the reforms.

The Economist has recently discussed this development in an article entitled “Shock treatment”.   Interestingly, this article only cites causes that have little or nothing to do with Obamacare or its spirit, and much more to do with injecting some free-market discipline into a system where, as I have pointed out earlier, it has been almost completely absent.  The article notes that “employers, who often provide health cover for their workers, are seeking to cut its cost by encouraging them to shop around on private exchanges, and by offering less generous plans.  The upshot is that there are growing numbers of consumers seeking better treatment for less money.”

The market has responded, as it always does, to this invigorated consumerism by innovation.  Many patients facing higher deductibles no longer go see their personal GP for routine matters; instead, they go into a cheap and convenient clinic at their local Walgreens (and soon to be their local Walmart).   Companies have engaged consultants to help their employees shop around for cheaper surgery and major medical procedures; sometimes, the consultants offer cash rewards (and taxi fares) for choosing less costly alternatives out of town.  And increasingly Medicare and private payers are replacing the historical “fee for service” model with a “fee for results” standard that rewards health care providers for successful outcomes rather than the proliferation of procedures and tests.   Although Medicare is doing this under the orders of the Obama administration, this change has little to do with the essence of Obamacare; the government has also been slower to adopt this change than several major private insurers.

In short, when the Democrats start trumpeting the cost-containment “successes” of Obamacare, we should respond to them with one of my father’s favorite sayings: “Even a blind pig occasionally finds an acorn.”

Disparate Impact

There is a case before the Supreme Court which is, I think, little known.  The case is called Texas Department of Housing v Inclusive Communities Project (ICP).  Assuming that sanity prevails and the Justices find for the Texas Department of Housing (“TDH”), then this case will remain in happy obscurity.  If, conversely, they find for the ICP (and Obama’s Department of Justice, which backs its claim), then this name will live on in infamy.  The decision is expected in June.

The case brought by the ICP relies on the doctrine of “disparate impact”, which is defined, in a recent Economist article, as a theory “which deems any act that disproportionately harms minorities to be discriminatory, regardless of intent”.    In other words, it will simply be necessary to prove that any policy – for example, an entrance exam, a hiring requirement, an allocation of government funds, or a police or court process – produces a numerically skewed outcome in order to have a case for discrimination.

It is hard to imagine a more disruptive legal rule or one that would be more offensive to most people’s sense of justice.  If accepted by the court, this would open a floodgate of potential discrimination litigation, the “proof” of which would simply become a numbers game: any field where minorities, or logically any group, are under-represented would become open to a charge of discrimination.  Justice Antonin Scalia, himself a full-blooded member of an Italian-American minority group that long suffered severe discrimination in America, has pointed out the absurdity of this theory by reference to the NFL: “The fact that the NFL is largely black players is not discrimination.”

We also have Mayor Bill de Blasio’s farcical assaults on the entrance exams for New York’s elite high schools, such as Stuyvesant High School.  De Blasio’s conclusion, as summarized in the sub-title of an Economist article, is “Top marks largely go to Asians.  Bill de Blasio wants to change the exams.”  Goaded by their notorious “Tiger Mothers” and with families that are willing to sacrifice everything for the education of their children, Asians now make up 70% of the pupils in Stuyvesant, even though Asians are an ethnic minority that has been heavily stigmatised and segregated throughout American history and many of whom are poor and recent arrivals in America.  Meanwhile, the percentage of white pupils at Stuyvesant has fallen from 80% in 1970 to 25% currently, in a mirror image of the sales line for Sony PS3 and PS4 gaming consoles.   The percentage of blacks and Hispanics has remained low throughout this period, although Mayor de Blasio’s own mixed-race son attends the elite Brooklyn Tech High School.

So please, Attorney General Eric Holder, tell us how the doctrine of “disparate impact” is supposed to help any court decipher the rights and wrongs of these exams?  And while you are at it, please tell us how to define the population to which the disparate outcome should be compared?  Is it the population of New York City, or the population of exam takers, or the population of science students, or some other arbitrarily defined group?  Surely, it is obvious to anyone outside of the Obama Administration and De Blasio’s mayoral office that this doctrine is a recipe for endless litigation, further ethnic polarization and an enhanced cult of victimhood among minority groups which would be better served by emulating the success of recent Asian immigrants than trying to undercut it.

(By the way, I understand that the Department of Justice’s report on the police force of Ferguson, Missouri, largely relied on similar reasoning to come to its conclusions.  I have pointed out the misuse of this kind of mathematics in my post on “Ferguson, Paris and the Reality of Numbers”.)

On a related subject, this is probably a good time to comment on affirmative action.  I have recently read a Foreign Affairs article entitled “Does Affirmative Action Work? Lessons From Around the World”.  The article was written by professors from Australia and Belgium and it surveys affirmative action programs around the world, including in Malaysia, India and South Africa.  It finds tepid results from the policy and comes to an earth-shattering conclusion: “The major lesson is that affirmative action policies work best when they target the poor”.  The fact that this passes for a scholarly epiphany explains why I am glad that I didn’t go into academics.

Imagine that you work in admissions for an elite university.  You have two candidates in front of you.  One of them has marginally better qualifications, but he grew up in Westchester County, has a lawyer and a banker for parents, and attended The Choate School.  The other candidate has slightly lower qualifications, but she grew up in a working class family, attended public schools and will be the first person in her family to attend college.

I think that most people would agree that the second candidate is obviously better.  Starting from far humbler origins, she has accomplished nearly as much. But choosing the second candidate doesn’t deserve the grandiose title of “affirmative action”.  A far simpler title – something like “logic” or “common sense” – will suffice.  And it probably doesn’t even require the government to legislate this choice.  From what my investment banking friends tell me, whose children almost always fail to get into Ivy League schools despite very strong credentials, this logical bias for candidates from non-privileged backgrounds has been applied for a long time.

This is the key point about “affirmative action”.  I don’t think that anyone objects, on the grounds of logic, economic efficiency or justice, to the preferment of candidates who have overcome a disadvantaged background.  What people do object to, however, is the automatic – and frankly racist – assumption that all minority members are disadvantaged and that all disadvantaged people are members of minorities.  This is borne out by my personal experience:  I attended college and graduate school, and I worked with, a number of members of minorities who had clearly benefited from affirmative action programs, but who had come from solidly middle class backgrounds.  Should they really have been treated differently from other similarly situated candidates just because of their race?  Or should we instead follow the 2007 dictum of Chief Justice Roberts that “(t)he way to stop discriminating on the basis of race is to stop discriminating on the basis of race”?

Ironically, a 2014 Supreme Court ruling is pushing admissions departments in the direction that they, had they not been infected by typically confused liberal thinking, should have chosen from the beginning.  After the Supreme Court affirmed the results of a referendum in Michigan that banned the use of race in admissions, Bloomberg reports that universities have done things like dropping the preference for “legacy” students, which benefited white students and had nothing to do with merit, and implementing programs of “comprehensive review” that “evaluates applicants’ academic achievements in the context of their life experiences and educational opportunities”.  In other words, they are now forced to analyse candidates on the basis of their individual opportunities and outcomes, as it should have always been.

(Of course, if these “comprehensive review” programs are implemented badly, they may just be a backdoor into the same mistakes, but at least this approach holds out the possibility of logical and just decisions.)

President Lyndon Johnson famously said “You do not take a man who for years has been hobbled by chains, liberate him, bring him to the starting line of a race, saying, “you are free to compete with all the others,” and still justly believe you have been completely fair…”  In this sentiment, he was correct.  Where he was wrong, conversely, was in only recognizing one form of chains.

Tennis

I have confessed to a few obsessions in this blog.  These are politics, economics and film.  Now I have to add another one: tennis.

Unless you follow tennis, you probably don’t realize that we are in the Golden Era of men’s tennis.  In an extraordinary coincidence, we have had four of the greatest tennis players of all time competing at the same moment.  The four are Roger Federer (who is sadly approaching his sell-by date), Rafael Nadal (who often drops out of tournaments due to injuries, although there are those who speculate that he is simply trying to avoid drug tests), Novak Djokovic (who is now primus inter pares) and Andy Murray (whose claim to these accolades is the weakest of the four, but who would have shone in any other era).  Between them, the “Big Four” have won 37 of the last 40 Grand Slams in a period of domination stretching from 2005 to the present.  There is no other sport in the world, at least to my knowledge, where you can find this type of rivalry.  This fact, especially when combined with the fact that tennis features one-on-one combat with the most interesting scoring system in sport, makes tennis by far the best spectacle out there.

Of course, we are also witnessing the greatest woman’s tennis player of all time, Serena Williams.  However, her domination is so total that the matches are rarely interesting.   A match with Serena consists of asking and answering only one question: will Serena win or will she beat herself?  There is nothing else at play.

Government Accounts

I have just finished reading The Great Degeneration by Niall Ferguson, the Harvard professor of economic history whom I have previously lauded for his broadsides against Paul Krugman.  The book is on the side of the angels, but the content is generally unremarkable.  He does, however, make one very good suggestion: the cause of fiscal discipline could be greatly enhanced if governments were required to prepare financial statements in line with Generally Accepted Accounting Principles, like companies do, instead of the bogus “cash accounting” that they currently use.  Among other things, this form of accounting ignores the huge liabilities associated with “entitlement” programs, it blurs the distinction between expenditures and investments, and it masks massive inter-generational transfers.   In Ferguson’s words:

The present system is, to put it bluntly, fraudulent.  There are no regularly published and accurate official balance sheets.  Huge liabilities are simply hidden from view.  Not even the current income and expenditure statements can be relied upon.  No legitimate business could possibly carry on in this fashion.  The last corporation to publish financial statements this misleading was Enron.

This is surely a sensible suggestion that would dramatically raise the quality of the fiscal debate and make it much harder for the politicians to engage in their favoured game of “kick the can down the road”.  It would be interesting to see if any of the Republican presidential candidates – the Democrats are a hopeless cause – would endorse this reform.

Roger Barris, London

I Wish That I Had Said That…

“Thus, after taking each individual by turns in its powerful hands and kneading him as it likes, the sovereign extends its arms over society as a whole; it covers its surface with a network of small, complicated, painstaking, uniform rules through with the most original minds and the most vigorous souls cannot clear a way to surpass the crowd; it does not break wills, but it softens them, bends them, and directs them; it rarely forces one to act, but it constantly opposes itself to one’s acting; it does not destroy, it prevents things from being born; it does not tyrannize, it hinders, compromises, enervates, extinguished, dazes, and finally reduces each nation to being nothing more than a herd of timid and industrious (sic) animals of which the government is the shepherd,” Alexis de Tocqueville in Democracy in America, sounding like it could have been written yesterday

“Posh c**ts telling thick c**ts to kill poor c**ts,” the character Eamon describing the British Army in the movie ’71

 

 

 

 

 

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Comments

  1. Karl Kiser
    April 7, 2015

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    I can’t argue stats and although I read the economist, I did not read that article on healthcare. Regarding Obamacare, I was disappointed that they didn’t inject more market reforms in the program. All that said, in my role as choosing and selecting healthcare insurance for 110 employees (I always wonder why I’m choosing what’s best for them, shouldn’t they be choosing what’s best for them? I digress), for the last 10 years our rates — and we shop around among various healthcare companies each year — have consistently increased from 12-22 % with 15% being the average. This current fiscal year, the first year of Obamacare, the rate increase was 7,5%. We just received our rate increase for next year, 3%, incredible, given 10 years of history. Contrary to the economist article, it is important to note that our rate of increase did not decline during the recession. I’m not sure why our rate of increase has so dramatically diminished in the last year, but clearly something good has happened. Now imagine if more market reforms were added?

  2. Roger
    April 8, 2015

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    Thanks, Karl, for your comment. Unfortunately, sitting in London, I have no direct experience of the American health care insurance market so it is very difficult for me to comment except about what I read in sources that I hope are reliable. I am sure that there can be a whole series of local factors that also affect your direct experience. I echo, however, your comments about adding more market reforms. I have read horror stories, for example, about how the pricing of medicines and medical equipment are distorted by restrictive government policies — I don’t think that Obamacare, after all the congressional lobbying from special interests and the explosion of the length and complexity of the legislation, touches very much on this. But above all, there is an assumption that medical care is completely a field where the normal interaction of self-interested consumers and sellers cannot work to produce a good outcome because, when it comes to medicine, consumers are too ignorant or scared to make rational choices. In fact, I think that consumers have historically had almost no incentive to make rational choices and the conventional assumption has simply become a self-fulfilling prophecy. The article starts to show ways in which motivated consumers can start to have a material impact on pricing, including by using their own consumer-advocacy experts.

    I believe that there are even bigger areas where incentives, if they were not totally anesthetized, can start to affect the market for medical services. These are the areas of lifestyle choices and end-of-life medical expenditures. I have recently read about a study that claim that 42% of cancers are lifestyle related. I think that most people view cancer as being one of the more random major diseases — with the exception of cigarette smoking causing lung cancer, of course — so I can only imagine that the percentages for something like heart disease and diabetes-related diseases are even higher. The other area where we have all read about — or experienced directly — horror stories is end-of-life treatments, which are often incredibly expensive and which often extend life for a short period of time during which there is basically zero quality of life. I would be fascinated to see a statistic on the percentage of medical expenditures which are related to lifestyle-induced diseases and end-of-life treatment. I think the result would be shocking and could lead to an interesting debate on whether society should be subsidizing these behaviors.

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