The Tragic Commons

Pricing Private Health Insurance

2009-09-05T06:09:00.004-04:00

I actually do have a life outside of the Tragic Commons. When I’m not here pontificating about cows, meadows and other intractable problems, I run a business. My wife and I sell promotional products (you know, trinkets, tschatckes, swag).

It’s relatively simple. The customer tells us what he or she wants, and we find a manufacturer who will make the product. The manufacturer tells us what it will charge us for the product, and then we resell the product to the customer at cost plus a profit margin sufficient to cover our overhead, which includes our once handsome salaries. When the customer receives his or her order and pays our bill on time, we do quite nicely.

When I try to think about some of the controversies surrounding health care reform in terms of my experience in the promotional products business though, I’m completely puzzled. I know how to price an imprinted coffee mug so that we can make a profit. What I can’t figure out is how the health insurance companies will be able to price their products so that they can make a profit, if some of the key ideas in the current debate are adopted.

In the bad old days of health insurance—which, sadly, are still with us—health insurance companies could do quite a good job in pricing their products, at least as far as group insurance policies are concerned. They could take a group, figure out what its characteristics were, and then develop a premium based on the statistical risks the group presented. Because they knew, from a statistical point of view, how much money they were likely to have to pay out in claims for any particular group—in other words, like us, they knew what their costs were likely to be—they could take their projected cost, add a margin for overhead and profit, plus, perhaps, a cushion to address the risk that their projections were incorrect, and divide the sum by the number of people they were insuring to arrive at a premium.

In a totally free market, an insurer is free to specify the services for which it will pay, “cherry pick” the people it wants to insure, and “lemon drop” people who turn out to cost it inordinate amounts of money. It can limit the amount it will pay with respect to any single illness, it can establish deductibles and co-payment requirements so as to discourage overuse of coverage, and it can set lifetime caps on individuals as a way of stopping losses. Though the current insurance market is not totally free, all health insurance companies do these things to some extent.

The health insurance reforms under congressional consideration seek to do away with almost all of this. They will require all Americans to buy health insurance coverage, and, in return, they will prevent insurance companies from “cherry picking” and “lemon dropping.” They will prevent health insurance companies from considering a person’s health condition in setting premiums, and they will also ban caps on coverage. The government would be able to specify a standard menu of required coverages for any insurance company that wants to participate in the proposed national insurance exchange. According to H.R. 3200, the last of the three health insurance reform bills to pass the House of Representatives, the only criteria a health insurance company would be able to consider in setting insurance premiums are the insured’s age, family size and region (it costs more to insure somebody in New York than in El Paso simply because the cost of living in New York is higher then it is in El Paso).

Immediately after adoption of these reforms, insurance companies, particularly those who would want to participate in the exchange, would have a larger problem. Since they won’t know—and they’ll never know—from year to year who is going to sign up for coverage with them, they have to have faith that the criteria in H.R. 3200 are sufficient to allow them to figure out what their costs are likely to be.

To me, though, setting premiums under these conditions sounds like shooting in the dark. It’s like a customer asking me to quote on a coffee mug without telling me how many he wants (the more mugs the customer orders, the lower the price) or anything else about the mug (you simply wouldn’t believe the number of different kinds of coffee mugs there are out there, but that’s a topic for a future post).

As a businessman under those circumstances, I’d do one of three things. I could say, “O.K. lets assume that the customer wants a top-of-the-line mug and that he only wants a few of them.” With those assumptions, I’m going to quote him a high price to protect myself against the possibility that I’ve correctly guessed that the customer wants only a few really expensive mugs. Of course, if I’ve guessed wrong, one of two things may happen: either I’ll make an outlandish profit, or else the customer will reject my bid and go to another vender who has priced the coffee mug more aggressively.

The other thing I could do is to price the product aggressively. I can assume that the customer wants lots of cheap mugs. If I’m right, I’ll get the deal and make a profit. If I’m wrong, there are also two possibilities: I’ll honor the deal I made, but try to make up the loss that results from the fact that the customer actually wanted only a few relatively expensive mugs on future deals I do with this client or with other ones, or if I guess wrong too consistently, I’ll go out of business because my costs will exceed my revenues.

Finally, I could just decide that without more information, I am not willing to offer a quote. I can tell the client “thank you very much, but I just can’t help you.” But what if I can’t find any other clients who are willing to play the game my way?
Now, remember, I’m a liberal, and though I reflexively feel everyone’s pain, and my heart has been conditioned to bleed for anyone who is experiencing any discomfort, I’m not particularly a fan of corporate welfare. I believe that insurance companies can take care of themselves, particularly since they spend so little time taking care of anyone else.

So, if I’m not about to make a case that health insurance companies are about to become an endangered species in need of additional government protection, does this post have any point? Yes, it does. What concerns me is the mischief this pricing uncertainty is likely to instigate.

First consider an insurance company that decides to offer low prices in order to increase its market share. Eventually, the “market share” strategy will draw large numbers of people, particularly older and sicker ones who cost the insurance company more money. The only problem is that an insurance company that consistently underprices its product will end up having to accept lower profit for its investors, cut back severely on customer service, delay payments to health care providers and potentially go out of business, leaving its policy holders without the coverage for which they have already paid.

The only other thing an insurance company can do to improve its bottom line is to “redline” its clientele by marketing only to people it would otherwise “cherry pick” and by making it hard for populations who present potentially higher costs to purchase policies from it. Though, by law it would have to offer policies on a non-discriminatory basis, it could locate its offices in places that unwanted customers can’t find or access easily, maintain a sales force that actively searches only for desirable customers, and advertise in media that only the desired people normally access. The same kinds of tactics have been used within recent memory to deny African-Americans and Latinos access to housing and credit.

Consider, next, the company that tries to play it safe by giving its product a high price. The company would avoid the problems associated with underpricing its product, but, obviously, overpricing insurance coverage won’t address the fact that one of the key reasons for reform is that insurance coverage is already too expensive. Because everyone would be required to buy insurance, if insurance companies adopt this pricing strategy and argue that you get what you pay for, health insurance costs will stay high, making it harder for people to afford, requiring the government to step in with higher subsidies. If the law is going to allow this, we may as well call it the “No Health Insurance Company Left Behind Act” because we will have created a massive bonanza for the health insurance industry without solving any of the problems true health care reform requires. In that case, no reform is preferable because we will have increased health care costs instead of having decreased them as we need to do.

Finally, consider what would happen if the insurance companies decide that they just don’t want to play, and opt out of the system. This is no mere speculation because it’s already happened in several states. Insurance companies have looked at a state’s regulatory atmosphere, concluded that they can’t make enough money there, and decide to turn their attentions to other states where the regulatory climate makes it easier for them to profit. If this happens across the nation, we’d be right back to where we started: despite a federal mandate, people who want to buy insurance can’t buy it because there are no companies offering acceptable care on the national exchange. Instead, insurance companies would focus their efforts on providing coverage to groups where they can at least make a reasonable estimate of what their costs are likely to be.

I’ll be the first to admit that I don’t know a lot about how insurance companies price their products and I would be happy for someone to show me where my thinking is off base. But, if I’m right, I think these observations show why a single payer system makes the most economic sense (except, of course, for the health insurance companies), and, failing that, why a strong public option—an insurer of last resort—has to be part of the plan.

With a single payer system, the payer can know, all the time, with a high degree of statistical certainty, what the health needs of the population are going to cost. It can know this because there is annual data on medical costs and it can use that data to build a trend line showing where medical cost are likely to be if current trends continue. Once it knows what the care is going to cost in the aggregate, it can easily divide up the financial obligation in the form of a tax imposed on everyone (though, to be politic, we should call it a health premium or a user fee).

If the politics won’t allow that, we at least need to have an organization not dedicated to making a profit for investors and with low overhead available in a national exchange. If there is at least one entity in the national exchange—the “public option” sponsored by the government--it makes the insurance company strategies of “don’t play” or “overprice the product” much harder to carry out.

By opting out, the conventional insurance companies will be leaving a huge market to the public carrier. If there is a public carrier in the exchange, people who can’t find insurance elsewhere will have a place to go. Though the public carrier would face the same pricing uncertainty that I’ve just discussed, eventually, if it is alone in the market, it will know who its customers are likely to be, particularly since it wouldn’t be able to “cherry pick” or “lemon drop.” The fact that its mission would be a little different from that of a private, for profit insurance company—its job would be to insure as many people as possible while covering its costs--would help quite a bit.

At the town hall meetings this summer, one of the loudest complaints was that H.R. 3200 is over 1000 pages long and was incomprehensible for the average person. That the average person doesn’t understand the bill clearly shows. Nobody seems to understand that one of the reasons that the bill is as long and complex as it is, is that the Congress has bent over backwards to create a place in the system for private insurance companies; the level of complexity would decline significantly if we got rid of private health insurance, at least as a primary component of the individual’s protection against catastrophic costs related to illness. Unfortunately, by trying to find a place for private insurance, Congress has spent a lot of time trying to build a system that, from a business standpoint, is not likely to work.

Saints and Suckers

2009-08-24T20:45:00.014-04:00

There are no saints or virtuous people in the Tragic Commons. In the Tragic Commons, there are only suckers and fools.

In the Tragic Commons, each cowboy always reasons that it’s in his interest to graze more cows there. Nobody pays any attention to the damage the collectively growing herds are wreaking on the resource. Though each cowboy can see the destruction that all of the cows are causing, no one individually is disposed to do anything about it. Were a virtuous cowboy to notice that together, the cowboys are collectively being fools and then, to decide unilaterally to cut the size of his herd, the other cowboys would call him a sucker. By reducing the size of his herd, the virtuous cowboy only reduces his own wealth; the other cowboys just mosey on in and start using the capacity the virtuous cowboy had abandoned. The Tragic Commons has not been preserved.

The virtuous cowboy sees this, so he tries to organize his neighbors to work, collectively to preserve the Tragic Commons. It’s a fine plan, except for three things. Suppose the cowboys can’t decide how to divide up the resource. Or, suppose that the cowboys do decide on how to divvy things up, but somebody cheats. Or, what if, after the cowboys have come to agreement, somebody new wants to use the Tragic Commons.

If you tire of the methane-filled bovine atmosphere, we can transform it. Consider the case of Dr. Tom Goodman who specializes in emergency medicine in Silver Spring, Maryland (the names have been changed to protect the virtuous). Dr. Goodman has been in practice for over 20 years and, over the years, he’s seen a great number of changes in medical practice. “Appendicitis,” he says, “used to be diagnosed by physical exam. . . now no surgeon will take a patient without a CT scan even in the most obvious cases.” Dr. Goodman notes that because it uses radiation, the CT scan “will increase cancer rates by 1% in the future.” That may not seem like a big percentage, but in a population like ours, with 300,000,000 people, an increase of 1% in the cancer rate means 3 million more people will get cancer because of unnecessary CT scans.

Dr. Goodman is annoyed by the way the system compensates the doctors involved. It will take only five minutes for the radiologist to interpret the results of the useless CT scan, and for that, the radiologist will earn $1,000.00; the surgeon who removes the ruptured appendix and provides the post-operative care will get only $300.00. He’s disturbed by the fact that the CT scan has not materially improved patient care over what was being provided in 1996 and that we’ve increased the patient’s cancer risk for no reason other than a marginal increase in the potential accuracy of the diagnosis. Read that as covering the surgeon’s rump, which he doesn’t want roasted in a malpractice suit if something goes wrong.

So what should Dr. Goodman do about all of this? Well, he could put his foot down and insist that CT scans are unnecessary when it comes to diagnosing appendicitis, but his brother doctors will tell him that their lawyers say that when most people in a profession begin to do the same thing in treating a patient, what they do sets a standard, deviance from which can set up a malpractice claim if something goes wrong. So the surgeons insist on getting the scan.

But suppose Dr. Goodman becomes the last angry man, and, armed with a black bag full of studies that prove he’s right, he still refuses to write an order for a CT scan. Chances are, the surgeons and radiologists, regardless of Dr. Goodman’s evidence, will speak to the patient about it, and since an insurance company will probably pay for the scan, they simply find another doctor to write the order. People always ask for the bells and whistles if they can get them for free.

Has Goodman accomplished anything in defiantly refusing to send his patients for CT scaDr.ns? Certainly, Dr. Goodman has demonstrated virtue, but because he wouldn’t make the referral, the patient has been moved to another doctor. The new doctor is more than glad to cover his own rump and, in so doing, help out his friend, the radiologist. If Dr. Goodman gets paid on a fee-for-service basis, he’s succeeded in reducing his own income. If he’s on salary, he’s made the first installment in building a reputation for non-cooperation that will eventually disadvantage him. He feels good and righteous about what he’s done, but unfortunately, he can’t use that good feeling to pay for his malpractice insurance. If he had recognized that the patient was going to have the CT scan with or without him, it would have been more rational for Dr. Goodman to play along.

Let’s suppose, though, that despite what I’ve just said, to the dismay of the radiology department, Dr. Goodman manages to convince the surgeons at his hospital that CT scans are not necessary for the diagnosis of appendicitis; if all of the surgeons agree that they won’t ask for scans when the patient presents with what seems clearly to be appendicitis, has Dr. Goodman won?

Emphatically not! There are three other hospitals in Silver Spring, all of which are owned by radiologists and operated by accountants and lawyers, where Dr. Goodman has no influence. In America, we want what we want, particularly if somebody else is paying for it. If patients, armed with the knowledge that many doctors use CT scans to diagnose appendicitis, begin to realize that they’re not going to get a CT scan at Dr. Goodman’s hospital regardless of the fact that their insurance will cover it, they’ll simply go to one of the other hospitals. And what will happen at Dr. Goodman’s hospital when a new hotshot doc shows up and doesn’t want to play it Dr. Goodman’s way?

My point here is not to excoriate radiologists, accountants or lawyers as being greedy or uncaring about patients. There are certainly many good radiologists, accountants, and lawyers running hospitals who care about others, at least as much as Dr. Goodman does. The point is that one virtuous person, or many virtuous persons for that matter, cannot reform a system from within it. To make systemic change you need an exogenous force with the power to regulate and enforce. For those of you who do not speak the language of academic political science, I just said you need something like a government.

Let’s go back to Dr. Goodman’s hospital. I’ve already shown that it is unlikely that Dr. Goodman, acting on his own, can do much about what he believes are wasteful, expensive, and potentially harmful CT scans. But, if Dr. Goodman can convince the state licensing board that he’s right, the licensing board can ban the procedure in all but a few carefully specified cases. In so doing, it sets a new standard of care that will protect doctors from liability for doing the right thing. Then, insurers don’t pay for it and, in a perfect world, health insurance premiums go down without a significant impact on the health care a patient receives.

In the foregoing example, what’s important is that the licensing board imposes a sacrifice or a constraint that affects everyone with an interest in a uniform way. Nobody has to calculate whether it makes sense to “disadvantage” himself by doing the right thing: the licensing board has already decided which actions are acceptable and which are not. There will be no cheating because the licensing board can punish a cheater by suspending or revoking his or her medical license. And, neither patients nor surgeons will have recourse to a second local hospital because all hospitals under the jurisdiction of the licensing board are bound by its decision and are subject to punishment for violating it.

This is why health care cannot be reformed piecemeal, doctor by doctor, hospital by hospital, insurance company by insurance company, or state by state. The reality is that while individual components of the health care system may work well, when each is allowed to make calculations based what is in its own interest, the system becomes dysfunctional.

Like it or not, what we nee d is systemic reform, and the on ly entity that has the ability to reform and control a system as big, complicated and unwieldy as the health care system is the federal government. We can argue about how it sets standards—I, for one, would like to see those standards set by physicians using scientific comparative effectiveness studies—but what we cannot argue about is the power of virtuous souls to negate the logic of the Tragic Commons.

Let's Get Fiscal

2009-08-19T17:35:00.011-04:00

Today, I present for your consideration the most disturbing image in all of American political science (and no, it does not involve Sarah Palin standing in front of an official looking building with one hand raised and the other on a Bible).

This snapshot comes from the General Accountability Office’s (GAO) 2008 report on the nation’s long term fiscal outlook. For those of you out there who haven’t had the chance to get fiscal for a while, GAO is an independent agency charged with auditing the government’s books. The office does first class, non-partisan economic analysis and is one of the best places to look if you want to get the facts about our government and how it collects and spends our money.

I know you were expecting monsters, and so at first glance, you’re probably wondering why a simple stacked bar graph like this should be so fearsome. The answer is that packed into this little image is almost all you need to know about our country’s future, if we maintain our current trajectory. It isn’t pretty.

Each of the stacked bars is a snapshot of projected government spending at a particular year, except of course for 2008, which shows actual spending. All of the bars assume that the Bush tax cuts that benefit middle class taxpayers and the “patches,” which keep the Alternative Minimum Tax from snagging middle class tax payers, remain in effect. They do not show the impact of Obama’s fiscal stimulus package nor the current recession, and so the country's financial future is actually even worse than would appear from the graph. The bars are graphed against projected Gross Domestic Product (GDP) to take into account the fact that as GDP rises, so do tax revenues and government expenditures. By using GDP as the graph's scale, we can make meaningful comparisons over time.

The first thing to notice is the line that runs more or less horizontally across all four bars. That line represents projected tax revenues. Because the line is relatively flat, the graph shows that GAO doesn’t expect taxes to go up significantly over the period. That’s a good assumption because historically, tax revenues, currently at about 18% of GDP, have averaged between 17 and 21% of GDP, and some economists have argued that higher tax rates tend to encourage more tax evasion and avoidance which would reduce actual tax collections to the historical range. The point is that we’re more or less maxed out on the amount of taxes we can wring out of the American taxpayer.

The next thing to notice is the obvious fact that in all four snapshots, government expenditures exceed revenues. In 2008, despite all of the yelling and screaming by Republicans, who have just rediscovered the sin of overspending, the amount by which spending exceeds revenue is relatively small. It’s nothing like what happens in 2018, 2030 and 2040.

The third thing to notice is that each bar has four components and that the components are stacked in a particular way. At the bottom of each of bar is the amount the government pays in interest with respect to money borrowed to finance the deficit. After that come the entitlement programs, Social Security, Medicare, and Medicaid, and then, after that, comes “discretionary spending,” a broad category that includes everything else we expect our government to do. Debt service and entitlement programs are “have tos” in the sense that there are legally binding promises for the former and at least moral obligations for the latter; the government has no obligation to spend anything beyond these things and so, theoretically, “discretionary spending” should be the easiest thing to cut in a pinch.

Now, brace yourself for the scary stuff. By 2030, only 21 years from now, the government will collect only enough money to pay interest on its debt, to pay for Social Security and for Medicare and Medicaid. Because interest on the debt, Medicare, Medicaid and Social Security are hard or impossible to cut and will be paid before discretionary spending, money for everything else, including national defense, food and drug safety, and investments in infrastructure, science and technology will have to be borrowed.

We borrow the money we need to cover the deficit by selling treasury securities like T-Bills. Because these securities are backed by the full faith and credit of the U.S. government, investors have been willing to lend at relatively low rates of interest. But as the debt grows, investors may begin to worry, either that the U.S. can’t or won’t pay them back, or that the government will adopt inflationary policies that reduce the value of the debt to investors. If that happens, investors will insist on higher rates of interest to compensate for the additional risk of default, or they may stop buying U.S. Treasury securities entirely. If that were ever to happen, the government would have to make a choice. Does it (a) short the investors who are holding our debt and thus make it even harder and more expensive for the government to raise the cash it needs to operate; (b) short seniors who have paid into the Social Security and Medicare systems through payroll taxes all of their working lives and plunge millions of them into poverty; (c) raise taxes to exorbitant levels, perhaps triggering a major recession or depression; (d) devalue the currency; or (e) stop paying for the soldiers, weapon systems, the food inspectors, the drug inspectors and a million other things that help hold a vast and complex civil society together? My kids will be in their 40s by 2030 when those choices may have to be made. How old will yours be?

What is striking about the composition of the various bars is how the relative sizes of the categories of spending change. The category that changes the least in relative terms is discretionary spending, and that means growth in government operations is not the main driver of our fiscal problems, despite what the people complaining about “big government” are saying. The category that changes the most is interest on the national debt. It grows exponentially, doubling every 10 years, and that is why it is so urgent that we get control of our deficit sooner rather than later.

The changes in the entitlement programs are also striking. They are growing so fast in relation to everything else because our population is aging. There will soon be more people who are older than 65 than there will be people younger than 25; the fun fact is that most of us will spend more time caring for elderly parents than we spent caring for our children. There will, therefore, be fewer people contributing to these programs through employment taxes than receiving benefits under them.

Here are the some of the graph’s more ominous implications. First, when you hear people complaining about “big government,” about “excessive government spending,” or about government "welfare" programs adding to the deficit, they clearly don’t know what they’re talking about. If you use spending as a yardstick for measuring the size of government, the government is “big” only because of interest expense, Medicare, Medicaid and Social Security; if you took away those three components, discretionary government spending would amount to a relatively small 10% of GDP consistently throughout the period covered by the graph. If we weren’t spending more than the next 10 countries combined on national defense, the size of government would be even smaller.

Second, since we probably can’t increase taxes enough to bring revenues into line with expenses, the only thing we can do to avert fiscal catastrophe is to cut spending. As long as we keep borrowing, there's not much we can do about our interest expense. You could try to focus your cuts on discretionary spending, but that's not going to help much. By 2030, even if you could cut out all discretionary spending--and that means all military spending, all infrastructure spending, all student aid, all food and drug safety, all air traffic control and all other government expenditures that help hold our vast and complex civil society together--revenue would still be insufficient to pay for the other three components. That means the only thing we have left to work with are the entitlement programs.

And third, if it isn’t obvious by now, let me make it crystal clear. As a political matter, it is unlikely that we will be able to reduce the stipends paid to seniors under Social Security. There is a reason most politicians regard it as the "third rail" of American politics: if you touch it, you die. That means the only place we can look for real savings is in the health programs. And that means we have no choice but to make these programs more efficient and inclusive.

Because it accounts for about half of all money spent on health care in the United States, we cannot fix Medicare without affecting the rest of the health care system. We have to find a way to bend the Medicare cost curve downward; it won’t do to lighten Medicare’s load by shifting health care costs to non-Medicare recipients because to do so will make the system even less affordable for everyone else than it is now. There is simply no way to argue that wage earners who cannot afford health insurance and their families should be bankrolling a system that only benefits senior citizens. As they say in the South, "that dog just won't hunt."

As a political matter, and despite what the lunatic Palinistas say, no one is going to deny Grandma Medicare coverage for quality medical care she believes she paid for when she was in the work force. What we need to do instead is to figure out what care Grandma really needs and get it to her in the most cost effective way possible, figure out what care society should pay for through insurance or Medicare, and what care it's fair to expect Grandma to pay for herself.

People who rail against federal deficits and debt, and insist on smaller government ought to be at the front of the line demanding health care reform, instead of lobbing stink bombs at it from the back of town hall meetings as they have been doing this month. Further delay in reforming the health care system only adds to the growing debt and its attendant interest obligation. That is why we need health care reform and that is why we need it now.

As always, your comments are welcome.

The Bet and the Important Conversation We're Not Having

2009-08-16T12:37:00.008-04:00

I pointed out in a previous post that despite all of the right-wing rhetoric to the contrary, our country already has “socialized medicine,” and that, in a high tech health care system like ours, it cannot be otherwise. The care we expect to receive when we’re gravely ill or in serious pain often costs far more than any individual can afford on his or her own.

Through health insurance we “bet” an insurer that, in any given year, we’ll need medical services that cost substantially more than the amount we will pay that year in health insurance premiums.Though we lose the bet more often than we win it—and that’s a good thing, since losing the bet means we haven’t gotten seriously ill that year—insurance gives us peace of mind that in those years in which we win the bet because of grave medical problems, the insurer will provide enough money to pay for the care we need.

It’s important to remember that in those years in which we win the bet with the insurer, it pays off with dollars raised from investing the amounts wagered by other people who have, that year, made losing bets with the insurer. Obviously, for the scheme to work, in any year, the insurer must win more than it loses. Otherwise, the insurer won’t have enough money to pay off its losing bets. If that ever happens, ironically, people who win their bets with their insurers will be out of luck.

This is one of the central problems of the current health care debate and it points to the crucial conversation we’re all avoiding. While it’s a lot more fun to rail against “socialized medicine,” to weep about the millions of people who don’t have health insurance or to make things up, things like Sarah Palin’s did when she infamously warned about Obama’s “death panels,” the conversation we need to have is about how to keep the insurers solvent. It matters not at all whether the insurer is a private company, like United Health Care, or a public, self-sustaining one sponsored by the government.In both cases, the issues are the same.

To guaranty that it will always be able to pay off its bets, an insurer can only do two things. The first thing it can do is to raise the cost of making the bet in the first place by making insurance premiums more costly. If it does that, it risks driving away customers who are willing to bet that they’ll end up spending significantly less on health care services then the annual insurance premium. That’s happening now. A large chunk of the “uninsured” population the President wants to draw into the health care system are young people who foolishly think they’re indestructible and can find a better use for the money. As insurance premiums increase, more and more people will be willing to make the same bet.

The other thing the insurer can do is to cut back on the services it provides by requiring larger deductibles and co-pays or by specifically excluding certain services from its insurance contract. The fact of the matter is that insurance contracts are extremely difficult for the average person to understand; very few people who have health insurance can tell you exactly what the contract covers and what it does not. Because they don’t understand their insurance contracts, many Americans have received nasty surprises when they get sick and find out that the insurer doesn’t legally have to pay for the particular care received.

Let’s assume that we want to set up a system in the United States in which everyone receives a prescribed level of medical care, and that we want to do it without significantly increasing the amount of money businesses and individuals pay into the health care system or to the government in the form of in taxes. President Obama says that we can get two thirds of the way there just by squeezing inefficiency and waste out of the system and redirecting the savings. This is probably far easier said than done, but let’s accept the assertion as true for the sake of argument.

Since we’ve already ruled out putting more dollars into the system, the only other way to close the gap is to reduce the payments flowing out to doctors, drug companies, hospitals and other health care provides. We might have used pixie dust to close the gap, but unfortunately, we’ve already blown our whole cache of it, during the Bush administration, on tax cuts for the rich that were supposed pay for themselves, and on a war of choice in Iraq that was supposed to be paid for with Iraqi oil revenues.

I can already hear my liberal friends beginning to growl at me for the implications of the last paragraph, even as the birthers, death panellers and tea partiers begin to rub their hands in anticipation of being able to claim another soul. Please. I’m a liberal, always was and always will be, but that doesn’t absolve me of the responsibility to speak the truth, even if it is bad PR for our side.

There is simply no getting around the fact that in any system of communal cost sharing, whether we call it insurance or socialism, we are dealing with a “zero sum game” in which more for me means less for you. Indeed, even if we hadn’t ruled out contributing more money to the system and agreed to get the money by raising premiums or taxes, at some point or other, we’d run out of money and be back to a zero sum game. In the tragic commons, all zero sum games lead to disaster. Because we are relying on a limited asset—in this case, a pool of insurance premiums—we have to figure out how we want to divide it up. As uncomfortable as it might be—we are literally talking about life and death--that is what we need to be talking about.

We can’t pretend, anymore, that everyone, at communal expense, should be able to have every treatment, test and procedure that might have a marginal beneficial payoff. Life is cruel sometimes, but the truth is that more heart transplants for the aged may mean fewer prosthetics for the handicapped.

I’m not arguing that prosthetics are better than heart transplants nor am I arguing that those people who can afford to pay for things insurance won’t cover shouldn’t be able to do so. What I am arguing is that it is time for serious adults to stop dodging the imperative of decision and face the issues head on. It’s time for people to stop talking past each other by using slogans and sound bites designed to create fear and rage and to start talking to each other about the real issues that lie at the core of this controversy. The discussion won’t be quick or easy, but it is necessary. We can’t simply adopt a laissez faire attitude and let the market or even fate work things out. Otherwise, the inexorable logic of the tragic commons will take over, the system will collapse and no one will be able to make a claim on that fateful day when he or she sadly wins the bet.

As always, your comments are welcome

In My America

2009-08-09T10:41:00.009-04:00

I believe in the freedom of speech. I believe that one of the things that makes America the “shining city on a hill,” as Ronald Reagan once called it, is the right of every American to believe what he or she wants, to say what he or she wants and to try to rally other Americans to his or her cause. I believe in the Enlightenment principle that holds that we should try to encourage free and open discussion of all issues because competition among ideas in the marketplace of ideas is the best way to insure that truth wins out overall.

So great is my belief in the freedom of speech that I have no problem with American Nazis, parading down the street in an American Jewish community, so long as the march is conducted in a peaceful way. I believe that protesters should have the right to burn American flags or even to advocate, in a peaceful way, for the overthrow of the government. I also believe that Ku Klux Klan members should have the right to burn crosses on their own property so long as they comply with regulations designed to make the activity safe to others on surrounding property. However hard it may be to stomach these noxious activities, you simply cannot believe in freedom of speech unless you also believe that the freedom extends to the speech you hate.

As a political scientist, I think it is a good thing for people to become passionate about social issues and to participate in the political process. I want more people voting, more people writing to Congress, more people discussing politics, more people signing petitions and even more people taking to the streets to demonstrate their support or opposition to governmental actions or inactions. Democracy is, in the end, a fragile thing that cannot survive without constant exercise.

But what is going on right now is shocking and frightening. The New York Times reported on Friday that

The bitter divisions over an overhaul of the health care system have exploded at town-hall-style meetings over the last few days as members of Congress have been shouted down, hanged in effigy and taunted by crowds. In several cities, noisy demonstrations have led to fistfights, arrests and hospitalizations. . . At an appearance at a grocery store in Austin Tex., on Aug.1, Representative Lloyd Doggett, a Democrat, was drowned out as he tried to speak on health care change. One opponent had a mock tombstone with Mr. Doggett’s name on it . . .This week, Representative Brad Miller, Democrat of North Carolina, said he had received a death threat about his support.

Shouting down? Hangings in effigy? Taunting? Fistfights arrests and hospitalizations? Personalized tombstones of living people? Death threats? This is not my idea of freedom of speech, and it is also not my idea of America.

The health care delivery system affects every American in an intimate way. It is a participant when we are born, we look to it when we are must vulnerable, and it is present when we die. It currently accounts for twenty percent of all the goods and services our country produces in any given year, and if the government fails to “bend the cost curve “ downward, it will account for more than that in the future. It is therefore no surprise that any discussion of changing the health care system arouses high passions in the public. There is a reason it has taken over 60 years for our country to have reached a point at which the adoption of a universal health care plan has finally become a real possibility.

We should, therefore, fully expect for frightened and angry people to show up at public forums where they emotionally confront their representatives with their concerns about any change. That’s completely fair game in our system. But that is not what is going on.

Leaving aside the allegation that the people who are showing up as opponents of change at these meetings have been incited and even organized by right wing organizations with political axes to grind and by business interests that have a stake in the status quo—they’re entitled to free speech as well—what’s disturbing are the tactics these people are employing. These people are not engaging in debate. Rather than competing in the marketplace of ideas, they are trying to shut the marketplace down.

At this point, there is no single bill upon which Congress is preparing to vote. Neither Congress nor even the party that controls it have yet to come to agreement on the plan’s key elements. Legislators are doing their duty by attempting to go back to their constituents to discuss the ideas Congress is currently debating. At this point everyone should be doing a lot more listening than shouting.

But, some of the health care opponents who have been attending these meetings aren’t interested in listening: they think they already know all they’ll ever need to know about this issue. Fair enough.

Far worse, though, they don’t want anyone else to learn anything that might dispose an undecided listener to support reform. They’re not interested in fair competition in the market of ideas. It would be facile to say that they know that their ideas cannot prevail in any other way and so they seek to impose them by force or default; in fact, they probably believe that they hold a monopoly on the truth, that anyone who disagrees with them is a dissembling traitor to the nation and that further discussion is just a waste of time. They know they are right; they’re just worried that further discussion can only trick the unsophisticated masses into supporting legislation that is, in their view, clearly contrary to the common good.

So, instead of wasting time trying to enlighten their fellow citizens through reasoned discussion, these people are trying to make discussion futile. They’re trying to drown out discussion. They don’t want to know what their representatives have to say. Instead of giving people on the other side of the controversy the benefit of the doubt, they’re behaving as if anyone who disagrees with them is evil and not worthy of a public forum. Rather than seeing their opponents as citizens equally concerned about the public good who simply hold a different view of the proper means to accomplish it, some of the health care reform opponents are treating their fellow citizens as enemies who should be delegitimized, dehumanized and ultimately destroyed.

In my America, we respect our fellow citizens and their opinions even if we disagree with them. In my America, we take it as a given that all of its citizens love their country, see it as a “shining city on a hill” and want it to survive into the future, prospering in the community of nations. In my America, we believe that decisions affecting the public welfare should be based on facts and on logic discovered through careful thought and deliberation and that all decisions should be based on what is best for country at large while still giving great deference to individual rights. In my America, we don’t hide from the truth, but rather, we seek it openly and honestly using the best human means with which we have been endowed. And in my America, we trust democracy.

When a faction of our citizens believes that the best way to engage in public discourse is through disruption, threat and intimidation, tactics the world has just seen used in Iran to brutal effect, and the rest of us tolerate it, is this still America?

As always, your comments are welcome.

Why They Fear Socialized Medicine

2009-08-05T17:00:00.014-04:00

In my last post, I made the point that those who carp against “socialized medicine” are speaking nonsense. In the modern world, many things, including education, fire protection, and food safety have already been “socialized,” and, in fact, without the “socializing” tool of insurance, our modern economy would not be possible. I made fun of the phrase “socialized medicine,” labeling it code for something else. Today I want to take that “code” seriously.

First of all, the people who oppose changes in the health care system in general and the creation of a public health insurance plan in particular aren't fighting for the right to continue paying insurance premiums to private companies. I don’t think anyone is so in love with Blue Cross or United Health Care that they’d be willing to take to the streets in defense of either company’s right to keep operating in the way it now does. I also don’t think that this is a battle about the right of individual Americans to choose between competing insurance companies. Most Americans are stuck with the insurers offered by their employers, and if we do not adopt health care reform, most Americans will have even less choice as health insurance coverage becomes too expensive for anyone but the very rich to afford.

What energizes the people at the grassroots level who are opposed to the Democrats’ health care plans are two levels of fear, one of which is rational and one of which, sadly, is irrational and the product of decades of mistrust cynically cultivated by the Republican party to advance its electoral fortunes. While the first kind of fear can be addressed with facts and logic, the second is more visceral and cannot be addressed in the same way.

The first of the fears is that the health care reform proposals, if adopted, will prevent people from getting the prompt and effective attention they have come to expect from the medical system. Let’s forget, for the moment that there is a broad swath of people who do not have adequate insurance coverage and who do not, therefore, get prompt and effective attention from the medical system. For now, let’s focus on the legitimate fears of the middle class people who are fortunate enough to have health insurance.

The President won’t tell you this, and neither will the Democratic leaders who are spearheading the reform effort, but the truth is that health care reform means that we will have to change the way in which we currently ration health care. It is a simple fact that health care in this country is already rationed; it is, however, rationed on the basis of ability to pay for it and not on the basis of need or on a generic per capita basis.

Basic arithmetic tells us that for some people to have more health care than they currently have without adding to the cost of the overall system, some people will have to have less than they have now. While comparative effectiveness research, electronic medical records, and an increased emphasis on wellness will, according to the President, free up about two thirds of the resources needed for everyone to receive coverage, the plans still have to find a way to make up the difference. Even if we assume that the political authorities are willing to raise taxes or cut other national priorities required to make this a first class system, more for some means less for others in the form of higher taxes or lost benefits. It cannot be otherwise in a communal system where limited resources must be equitably shared. The trick, of course, is to find that optimal point at which everyone receives a fair share of the limited resources.

If that optimal point cannot be found, the tragedy of the commons will rear its ugly head: in a zero sum game, nobody will be willing to reduce his or her consumption unless everyone else has to reduce consumption as well. Instead, everyone will myopically see it to be in his or her interest to consume as much of the resource as possible--until the some of all the individual consumption results in the collapse of the resource. Unfortunately, there is no way around the fact that health care reform will create, either intentionally or unintentionally, a new group of winners and losers. Obviously, nobody wants to be one of the losers.

The second fear is that of a government swollen with enormous power, able to impose life-altering choices on the people without their consent. It is a vision of a totalitarian state, a nightmare out of Orwell or Huxley, and it betrays a massive lack of faith in ourselves and in our system of government. The irony is that the great threat to our government “of the people, by the people and for the people” in the years of crisis ahead is that it will be able to do too little, and not that it will be able do too much.

Specifically, those who fear socialized medicine worry that some government bureaucrat will some day decide which doctors a person may see and what treatments a person may have, even to the extent of prescribing death to a person whose life that bureaucrat deems to be of little value. Perhaps health reform opponents would even concede that insurance company clerks already have this power; these opponents would argue, though, that in our free market system, there is at least the possibility of buying other insurance from companies whose clerks are no more accountable but potentially more lenient. Not so in a world where the government holds a monopoly over this crucial aspect of life.

What saddens me about this debate is that we are even having it on these terms. I was born in an expansive era in which we were exhorted by a vigorous young president to ask not what our country could do for us, but rather to ask what we could do for our country. It was a clarion call to community, an acknowledgement of the Biblical lesson that we are all our brothers’ keepers.

Only 20 years later, that young president’s polar opposite, Ronald Reagan, told us that the problem with our society was our communal concern for one another as manifested in our government. Government rules and regulations meant to protect the community were encumbrances on liberty, he argued. Taxes, what Oliver Wendell Holmes once described as the “dues we pay for a civil society” were not a necessary evil, but instead, just an evil. Reagan insisted that it was far better for individuals to keep their money and spend it on themselves, rather than to contribute it for the purpose of escaping from the tragic commons.

The problem is that Ronald Reagan’s selfish view of the world still resonates. It’s so much easier, after all, to provision one’s own lifeboat for a flood than to join with others to try to prevent the flood in the first place, particularly when he or she can’t be sure that everyone else will be willing to make a similar contribution or sacrifice.

Unfortunately, the key lesson to take from the tragedy of the commons is that ultimately, no one can escape the tragedy alone. To survive, it takes a community.

Who's Afraid of Socialized Medicine?

2009-07-31T14:15:00.032-04:00

There are two good responses to people, who, when discussing the government’s current attempt to hatch health care reform, start screaming about “socialized medicine.” The first is “You don’t know what you’re talking about.” The second is “What’s wrong with socialized medicine?” Both responses are attempts to help the conversant to reach an epiphany, although, admittedly, if rendered without a touch of gentle humor, the first is likely to earn you a pop in the nose.

The people who are worried about “socialized medicine” aren’t generally scholars, political or otherwise. They are generally reacting viscerally to leftover propaganda from the Cold War. To them “socialized medicine” conjures up images of what they were told to imagine about Soviet health care: dingy offices equipped with World War I era instruments and elixirs and staffed by drunken doctors and ugly nurses. They’re mostly speaking in code to signal to others, who might be like-minded, that they never miss Sean Hannity and that they agree with Brother Limbaugh on just about everything.

What does it mean to say that something is socialized? In broad terms it means that the responsibility for something has been transferred from an individual level to a group level.

To really zero in on this concept, it’s helpful to think about the world in pure terms. Let’s start by imagining a world in which nothing is socialized. In fact, such a world did once exist in the country—about 200 years ago. In that world, each man (women weren’t discovered in this country until about 150 years ago) would, as the Great American Myth has it, go off into the vast expanse of this continent with his axe, his shotgun, and his horse. He’d find a tract of land nobody else had claimed, clear it of trees and other inconveniences, and build himself a little cabin. He’d live off the land, perhaps by growing crops, by raising livestock, by fishing or hunting. If he wanted something he couldn’t raise, kill or make himself, he’d just trade for it. In that world, there could be no tragedies of the commons because the commons was huge and the demands being placed on it would have been infinitesimal.

A small fraction of the crowd that lives in deathly fear of socialized medicine actually believes we’d all be better off if we could return to those simpler days of yesteryear. At least they’re being consistent. The guy who’s about to pop you in the nose, though, is probably not one of them.

He probably lives in a city, town or suburb just like you do, and recognizing that is how you help your discussion buddy to have the epiphany. Unlike Daniel Boone, this guy probably has kids he sends to a public school. He only bears a fraction of the cost of educating them through the property taxes he pays. Using a public school system is sensible because economies of scale make it more efficient for communities to pool their resources and provide for a centralized way of educating children. Even if he sends his kids to private school, and pays full tuition, the logic of economies of scale prevail. True, your conversation partner doesn’t have as much say over what his kids learn in school as he might have if he were home schooling them, but his costs for the service are much lower and the quality of the education his kids receive is likely to be higher. The point is that by transferring his responsibility for educating his kids to the community, he’s participated in socializing education.

In addition to education, we’ve socialized almost everything else our conversation partner comes into contact with, and, for the most part, he’ll probably be darned happy that we’ve done so. Professional firefighters, police, air traffic controllers, food and drug inspectors, soldiers, letter carriers and other people who make our lives safer and more comfortable are all the result of socializing costs, as are roads, parks, and public libraries.

http://www.flickr.com
/photos
/danaroundtown/
/ CC BY 2.0

The foregoing are examples of how we have transferred private costs to the government. The concept of socialized costs, though, extends to the private sphere as well, and the best example of this is what’s started the argument in the first place: insurance. With insurance, a large group of individuals each pay a small amount to transfer risks he or she ordinarily doesn’t want to bear to a counterparty who will bear the loss if the risk materializes. The system works because, ordinarily, the payment from each individual is small in comparison to the contemplated loss, and because the thing the individual fears may happen to him, ordinarily doesn’t. In fact, without insurance our modern economy would not be possible.

To the backwoodsman described earlier, the concept of insurance is repugnant. In his mind, your bad luck is, well, your bad luck. To him, a person should pull his own weight and not burden others. That’s a nice theory, fully consistent with the American mythic credo of self-reliance. Too bad it doesn’t really work.

Suppose our discussion buddy has a heart attack while screaming about socialized medicine. Without having socialized the risk through health insurance, he’d probably die, basically because he wouldn’t be able to afford what our system currently charges for the care required to save his life. On a broader basis, without having socialized the risk of major health problems, our medical system probably would not have been able to develop the required technologies or surgical know-how; because there would not have been enough people who could afford to utilize breakthrough medical technologies, it would not have proved profitable for doctors, pharmaceutical companies and medical equipment suppliers to develop these capabilities in the first place.

If you really press your conversation partner—gently, of course—you’ll both see that the issue really isn’t “socialized medicine” at all. Once you strip away the Cold War lore and the right-wing code, except for the survivalist crowd, everyone can probably see that socializing certain costs—and health care costs in particular--is not such a bad thing. The real issue is control, a topic I’ll turn to in a later post.

As always, your comments are welcome.

Ducks, Camels, Stallions and Health Care Reform

2009-07-28T09:00:00.011-04:00

We political scientists have a plethora of theoretical rules of thumb, analytical frameworks, and inferential strategies that we use to weigh data presented to us. Here's the one I like: If something walks like a duck, swims like a duck, and quacks like a duck, the probabilities are high that the thing in question is a duck.

We also have this observation: A camel is a horse assembled by a congressional committee.

Which brings us, today, to one of several postings I'm planning on health care reform.

Paul Krugman of the New York Times has helpfully summarized the commonalities of the health reform plans now floating around Congress. According to Krugman's column today, all of the plans rest on four pillars: regulation, mandates, subsidies and competition. Chastising the "Blue Dog" democrats for refusing to go along with their more liberal brethren (who hail from safer districts), Krugman warns that if you "knock away any of the four main pillars of reform . . . the whole thing will collapse — and probably take the Obama presidency down with it."

I think Krugman is right about the system collapsing. But what's more interesting is the unnecessary load these pillars are carrying. Let's go one by one.

Regulation--Krugman means the nationwide imposition of rules that "would prevent insurance companies from denying coverage based on your medical history, or dropping your coverage when you get sick. This would stop insurers from gaming the system by covering only healthy people." Regulating insurance, though, has traditionally been the responsibility of the states. That's why people in different parts of the country get different kinds of coverage. The current plans in Congress would shift this responsibility from the local level to the national level. It's just another way of saying that the feds are going to take responsibility for health care from now on.

Quack!

Mandates--The plans tooling around Congress right now would require everyone to pay, in some way, for health insurance. The objective here is to force the healthy young people into the health insurance system, because otherwise, the concept of insurance won't work. Insurers need a large pool of people who won't be making major claims for benefits to finance the relatively small pool of sick people who will be making claims for benefits, and, of course, to turn a profit. If you only have sick people in the pool, and they all make major claims for benefits, the insurance company can't stay in business.

But . . . 'mandate' is such a clunky, bureaucratic, and vague word, lacking emotional resonance. Hmm, what's another word for a government requirement to take money out of your pocket and give it to someone to whom you'd rather not give it? I know! The word is 'tax.'

Quack Quack!

Subsidies--Health care reform will encounter strong opposition unless everyone can afford it, and so, to the extent that health care coverage costs more than a person can afford to pay, all of the current proposals have the government making up the difference. From the standpoint of the person receiving the subsidy, the subsidy is a discount; from the standpoint of society, a subsidy is a way of making the cost of the thing being subsidized more compatible with a person's resources. This works the same way that, say, a flat tax, extracts an equal percentage of a person's income, regardless of whether the person is rich or poor.

Quack! Quack! Quack!

Competition--The current Democratic proposals call for the creation of a "public plan" that would compete with private insurers so as to hold down premiums charged by the for profit insurers. I don't think I even need to explain this one.

Quack! Quack! Quack! Quack!

There you have it, all of the elements needed to make a single-payer system grow and prosper: a national health care regime, supervised by the national government, supported by a general levy, calibrated not on market values but on a person's ability to pay. Congress is merely trying to change the names of its major components so as to befuddle and confuse the good folk in the hinterland beyond the Beltway. I don't think it will work. Most people can recognize a duck when they see one.

Unfortunately, in assembling all the parts, Congress has an extra piece--private insurance--and it can't quite figure out what to do with it. If it were smart, it would simply recognize that the piece is extraneous, throw it away, and end up with a fine, sleek, muscular stallion. Instead, it's insisting on using that piece, and so it's going to settle for a camel, superbly adapted to the political environment, but awkward, lumberingly slow and ugly.

For Krugman, this would be acceptable. His theory, as he explained it on This Week With George Stephanopoulos, is that it is more important to pass something now and refine it as we go. He points to Massachusetts, the only state to have adopted an insurance mandate for all residents thus far. He notes that Massachusetts has achieved universal coverage, and, having found that its plan for controlling costs was somewhat deficient is trying to address those shortcomings in the next iteration.

I'm grateful for the delays the "Blue Dogs" and yes, even the Republicans are demanding. The last time the government tinkered with health care, we got Medicare Part D: a law rich on benefits but poor on cost control. Congress simply didn't do its homework on that major legislation, missed the law's long term financial, impact and set the country on a path to financial ruin. When we're talking about legislation that will affect every American and transform 17% of our economy, we should take our time, ask good questions, and understand what the real numbers--best case and worst case--are. We've waited over 60 years for national health care. I believe that some form of health care will pass this year. It's worth a few more months to make sure everyone understands what's going to happen and that whatever the government does will ultimately work. It's not clear that Krugman is right, that failing to pass health care reform will doom the Obama presidency. What is clear is that if we get this wrong, we could doom the country.

I will admit, though, to my own naive agenda. I want this process to slow down because I believe that once people truly understand that what Congress is considering is likely to be an expensive way of achieving universal coverage, Congress will go back to the drawing board and sketch out something serious. My hope is that they'll forget about all the nonsense, perhaps laugh about the folly, and deliver the kind of health care plan that, according to polls, an overwhelming number of Americans want. You see, at the end of the day, most people would probably want a stallion instead of a camel.

The Constitutional Right to Behave Like a Jerk

2009-07-25T16:13:00.016-04:00

Most of the current yammering by the media, the president, and the civil rights community about the arrest of Harvard professor Henry Louis Gates is missing the point. There is something even far more fundamental than race involved in this little drama. It's time for the civil rights community to sit down and for the civil liberties community to stand up.

We simply don't know and can't know whether this is a case of racial profiling. We have different accounts of what happened given from the biased perspectives of those involved. It's impossible to know for sure whether the police would have arrested Gates if he were white or if the lead police officer on the scene had been black. But, it doesn't matter.

Let's boil the situation down to its human fundamentals and drain the situation of its racial overtones. A concerned citizen sees two men trying to break into a home late one night, and she does her civic duty by calling the police. Police officers promptly appear at the scene, but by the time they arrive, the men who the citizen observed have already gained access to the home. The police go to the front door, knock on it and seek to speak to the occupants. One of the occupants, as it turns out, is the home owner--an older man of small stature and slight build who walks with the aid of a cane-- who is startled to see the police on his front porch. During the course of determining whether the man is the home owner, something that happens early in the interview, the home owner takes umbrage with the police officer. A verbal brawl ensues, and it ends when, after being warned that he is being "disorderly," the police officer informs the home owner that he is under arrest. He places the home owner in handcuffs and takes him down to the police station where he is fingerprinted, photographed and apparently thrown in a holding cell until someone comes to bail him out.

Because the racial overtones of this case are irrelevant, let's give the police officer the benefit of the doubt and accept his version of the facts. In an interview with a local television station, the police officer, Sgt. James Crowley said that

I asked him (Gates) if he would step outside and speak with me, and he said 'No, I will not,' and words to the effect of 'What's this about?' and I said, 'I'm Sergeant Crowley from the Cambridge Police Department. I'm investigating a break-in in progress. And he said 'Why? Because I'm a black man in America? in a very agitated tone, and . . .I thought that was a little strange. . . I then asked him if there was anyone else in the residence. . . I wasn't expecting his response which was 'That's none of your business.' To me, that's a strange response for somebody who has nothing to hide, is trying to cooperate with the police.

From Sgt. Crowley's perspective then, Professor Gates was abusive, uncooperative and acting like a jerk.

Fair enough. From this description I'm sure that we can all imagine exactly what the situation looked like to Sgt. Crowley, who, btw seems to be a calm and reasonable kind of a guy. Anyone interested can see the complete interview here. Taking Sgt. Crowley's statement as the complete and indisputable truth, though, there's still a problem.

Nobody likes being verbally abused or accused of being a racist, particularly while trying to do a difficult and often dangerous job. This is probably particularly true for a person like Sgt. Crowley who probably views himself as one of the good guys who is trying to make the world a better place. Heaven knows the job of a police officer is often a thankless one, and we all owe our greatest respect to people like Sgt. Crowley who get up every day and work at making us all safer.

That said, police officers should not be able to use the coercive powers of the State to defend themselves against the kind of verbal abuse Sgt. Crowley says he experienced. And it's certainly not good enough to say that just because a person doesn't want to follow a police officer's script, he or she must have something to hide. In this country, we are all innocent until proven guilty, we are within our rights do deny police officers the right to search our persons, our cars, or our homes unless they have probable cause (in many cases backed up by a search warrant), and to refrain from making any statements to the authorities for any reason.

In this case three things are clear: (i) before he arrested Professor Gates, Sgt. Crowley knew that Gates was the legitimate owner of the home; (ii) the altercation took place at Professor Gates' home and not on the street or any other public place; and (iii) there was little threat of danger from Professor Gates to either Sgt. Crowley or anyone else. We also know that the charge of "disorderly conduct" is a relatively vague charge that can be used to remove people from public places such as shopping malls, public streets, places of business, governmental offices and parks who are disrupting the activities that normally take place there.

http://www.flickr.com/
photos/12587661@N06
CC BY 2.0

It has long been a basic principle of American law that, as the Fourth Amendment to the Constitution puts it, the people have the right to "be secure in their persons, houses, papers." As a matter of history, one of the reasons for the American revolution was that the king's men would violate these rights with impunity. In America, we put a stop to that kind of behavior, and our courts have consistently held that before police officers, as agents of the State invade the sanctuary of the home, they need a good reason, often as certified by an independent judge or magistrate.

Sgt. Crowley had a good reason, at the outset. He was investigating a potential burglary. Once he determined that there was no burglary, though, he had no further right to be there. His responsibility was to tip his hat to Professor Gates, bid him goodnight, and walk away, regardless of what Professor Gates was yelling, as long as the probability of danger was low and the probability that Professor Gates would stop yelling once Sgt. Crowley went away was high.

It matters not at all that Sgt. Crowley perceived Professor Gates to be hurling insults at him. Professor Gates was on his own property, not making any attempt to pursue Sgt. Crowley off the property or to engage in acts of violence. As far as I know, it's not illegal the scream insults or abuse from your own front porch, even if it does make you look like an idiot. Our constitution protects jerks and idiots.

What it does not protect is a male ego from annoyance or loss of status, and I believe that's what we are really talking about. In this case we had two "alpha males," in a very human situation, each feeling personally aggrieved by the actions of the other. One of those men decided he wasn't going to take it anymore, had a badge and a pair of handcuffs and decided to used them to "win" the battle. Since I'm giving Sgt. Crowley the benefit of the doubt, I'm not saying he was wrong to feel aggrieved; I'm sure anyone in his position would have felt the same way. I also understand that by turning his back and walking away, on a human level, both men would have perceived Gates to have been the "winner" of the encounter because it would have seemed that Sgt. Crowley had backed down. But we cannot allow police officers to use the enormous resources at their disposal to settle personal scores, and that is exactly what Sgt. Crowley did.

Sgt. Crowley is clearly a man of good will, and generally the kind of cop I hope is protecting my community. But not all cops are people of good will and we cannot allow any of our law enforcement personnel to develop the idea that they can use the law in a way the rest of us can't to gain the upper hand against a person who has irritated, insulted or annoyed him. If we do, we all need to be afraid of the police. Do we want people like me to have to worry about a visit from the constable because I'm not taking Sgt. Crowley's side in this matter and because I'm saying that he acted "stupidly"? That's not the kind of country the Founders thought they were building when they ratified the Bill of Rights.

As always, your comments are welcome.

http://www.flickr.com/photos/perspective/ / CC BY 2.0

Tragedy of the Commons, Home Edition

2009-07-21T20:57:00.016-04:00

Sign Of The Times - Foreclosure
Originally uploaded by respres

The origins of the current recession are well known. It began in the housing market where some people entered into contracts that eventually became toxic. Mortgage brokers sold subprime loans to people who either didn’t understand that the interest rates would step up dramatically in the future or who gambled that they’d be able to refinance these mortgages with something more conventional in a few years after time had given them some equity in their homes. These mortgages got sold to syndicators, who, in turn, packaged the loans together and sold bonds supported by the monthly mortgage payments the borrowers would be making to investors in the financial markets. Investors bought these bonds understanding that some of the mortgages would eventually go into default, but, because the mortgages had been pooled, the cash flow of the non-defaulting mortgages and the sums that would be raised upon foreclosure of the defaulted mortgages would more than support the prices the investors had paid for their bonds. The rating agencies assured everyone that these were relatively safe investments with good returns.

Of course, this whole house of cards stood on two unstated assumptions. The first was that at any given time, the number of current loans would vastly outnumber the number of loans that went into default. The second was that the value of the underlying real estate would never decline. After all, real estate only appreciates in value, doesn’t it?

Both of these assumptions turned out to be wildly wrong. The loans, after all, were made to subprime borrowers and so, when the loans began to reset at rates dramatically higher than the initial introductory rates (and in fact, higher than prevailing interest rates), it shouldn’t have been surprising that these loans would go into default. And it also shouldn’t have been surprising that, consistent with the laws of supply and demand, when a large number of properties showed up on the market in distressed conditions, prices would fall.

All of this set off a chain reaction that triggered a recession. When people stopped paying their mortgages, the lenders holding the bonds all of a sudden had worthless assets. The big insurance companies had to pay off on credit default swaps based on the loans. Worthless assets reduced bank capital and made it difficult for lenders to lend. The credit market seized up. Businesses that depended on financing from these lenders couldn’t get funded to buy equipment, increase inventories, or even pay workers. With fear of the future, people significantly reduced spending, further hurting businesses and sparking layoffs. With lower income, people started paying less tax to state and local governments making it harder for them to maintain services.

If there ever were a time for the Good Lord to send us Barack Obama and a flock of liberal Democrats to Congress who instinctively distrust big business, this would be it.

With a little more effort than I’m willing to put in right now, I could make an argument that the way the financial system worked was rational at an individual level but irrational at the aggregate level, and is thus another example of the tragedy of the commons. But what really interests me (and what I really wanted to write about) is the tragedy that is playing itself out in the real estate market.

Imagine that you’re a lender and you’ve got a borrower who has gone into default on his mortgage. In the good old days, you might call the borrower into the office for a nice little chat about fiscal responsibility and the consequences of failing to pay his loan on time. In an unusual case, you might cut the borrower some slack—renegotiate the loan, defer some payments—in return for additional consideration later. The thing you’d try to avoid at all costs is to take the property back. Lenders, after all, are in the business of lending money and collecting payments. They are not in the business of owning and managing real estate—that, of course, is a “hands on,” expensive and risky business.

Suppose though, that you can’t cut a deal and that you have to go through the foreclosure process. That would mean that you’d have to hire a lawyer, go through a lengthy legal process—spending money on legal fees, taxes, insurance and other related costs—and not get any money from the borrower. In the good old days, you’d count on being able to sell the property after foreclosing on it for at least your loan amount and the expenses. Perhaps, after all was said and done, you’d more than break even. That’s what should happen in a functioning market. None of this is a tragedy, except perhaps for the borrower. The distressed property goes into the market and gets sold just like any other property.

But now, let’s suppose that instead of one property, you have a couple of hundred that are in distress, and so do your 10 competitors. Let’s also suppose that instead of being a banker like Mr. Drysdale or George Bailey, you’re just a loan servicer who has little discretion and represents a huge number of individual bond holders who hold different “tranches” of securities and may have conflicting interests. You’re set up to collect payments, deal with a few property related issues, but you don’t have a big staff of people and you’re certainly not being paid enough to negotiate with hundreds of borrowers. Besides, there may be liability if you try to do anything like restructure any of the loans, even though that may benefit the bond holders.. Now, what do you do?

You take the easy and obvious route. Taking note of the fact that there are potentially thousands of distressed properties about to hit the market, you scurry down to the courthouse and file foreclosure actions as fast as you can. You hope you can get into the market and out of it before the iron laws of supply and demand begin to work their evil magic. Unfortunately, that's exactly what you're competitors do also.

Does anyone hear the cows chewing up the grass? This situation is exactly what happened to the self-interested cattlemen I wrote about in my last post. Individually, there is no harm in putting a few properties into the market since they will not have any material impact on the general health of the market. But, when everyone does it at the same time, just like the overgrazed meadow, the market can’t absorb the load and it tanks. Everyone, including all of the lenders who thought they were protecting their interests by putting properties into foreclosure, loses. To wit:

· The fair market value of most properties sinks;

· As people begin to lose their accumulated equity in their homes they see less value in staying current or in performing maintenance;

· Some people abandon their homes, reasoning that without any equity in the property, they’re simply renters, and if they’re renters, it makes no sense to pay principal and interest when they can move to lower cost apartments;

· As people abandon their properties, more vacant homes make surrounding properties less valuable;

· More properties added to the market reduce property values further;

· People who would otherwise become buyers see that the market dynamics are creating a downward price spiral, so they sit on the sidelines and wait until the market hits bottom;

· Lenders who are holding properties that are worth less than their loan balances may have to sell those properties cheap just avoid even greater losses;

· Cheap sales establish the “going price” for surrounding property and further depress property values.

All in all, this is an irrational way to proceed. But this is what happens when we let Adam Smith’s invisible hand guide the market.

The lessons for our current predicament ought to be clear. First of all, we’re caught in a vicious spiral with the real estate market at its vortex. If we’re ever going to get out of this recession we simply have to do something about the housing market. We may never be able to drive real estate prices to where they were several years ago, but we need to find a way to stop flushing toxic waste into the real estate commons. The market needs a floor, even if the floor is somewhat artificial.

And second, we can’t trust the market to right itself any time soon any more than we could expect Hardin’s meadow to spring back to life on its own. We need a coordinated and reasoned way to prevent people from doing what seems to be in their best interest, but, in fact, is in their worst interest. The solution has to apply to everyone, because if it doesn’t, the people who don’t cooperate will profit at everyone else’s expense.

Is there a way to do this? You bet. I have my own ideas, which I’ll get to in my next post, but I’d love to hear what you have to say. As always, your comments are welcome.

Raison D'Etre

2009-07-19T17:00:00.005-04:00

In 1968, a year which rightfully claims a place as the great divide of our era, Garrett Hardin, a biologist, published The Tragedy of the Commons, an essay that has greatly influenced the way I think about the world. Indeed, I believe that if we fail to come to grips with the problem Hardin identified, we are virtually guaranteeing the decline of our country and peril for our descendants. I believe that The Tragedy of the Commons must be the starting point for any discussion of the future.

Hardin asked us to imagine a vast meadow suitable for grazing cattle. Upon reaching the meadow, what, he asked, would a rational cattleman to do? Following his own self-interest, the cattleman would increase the size of his herd. If the meadow is vast, the cattleman reasons that adding to his herd increases his own profit without adding cost, at least as far as the meadow is concerned. If he overgrazes his cattle in one part of the meadow, he simply moves to another part of the meadow, allowing the overgrazed part to regenerate.

What happens if more cattlemen discover the meadow? They make the same calculation as the original cattleman did. Adding to the herd makes individual sense, regardless of its effect of the meadow. Soon, the cattlemen, thinking selfishly, have reached the limit of the meadow's ability to support all of the herds, overgrazing occurs, and the meadow "dies" in the sense that it can no longer support the herds of cattle that have come to graze on it.

As Hardin points out, this "tragedy of the commons" raises a challenge to Adam Smith's notion that an individual who "intends only his own gain," is, “led by an invisible hand to promote…the public interest." In a "tragedy of the commons" scenario, each actor has complete freedom to use the commons as he or she wishes; he or she takes all of the profit, but distributes the cost to others.

Of course, it matters how "vast" the commons is in order to assess whether an action or inaction will lead to tragedy. "A hundred and fifty years ago," Hardin argued "a plainsman could kill an American bison, cut out only the tongue for his dinner, and discard the rest of the animal. He was not in any important sense being wasteful. Today, with only a few thousand bison left, we would be appalled at such behavior." In earlier ages, when the human population was small and its impact on the natural world insignificant, the possibility of tragedy was remote. Today, we live on a world with 6 billion other people, each, morally, at least, having an equal claim to the planetary commons, and it is no longer possible for anyone to move off the commons for greener pastures, as our lone cattleman could have.

One way of addressing the tragedy of the commons is to make an appeal to the reason or the conscience of the resource users and insist that they take voluntary action to avert the tragedy. Hardin argued, though, that this tack is likely to be ineffective for two reasons. First, a person who voluntarily complies with a conscience-oriented appeal merely frees up resources for the others who don't or won't comply. Second, because these "ethical" people will be at a disadvantage, in the short run, evolution will make those who maximize the use of the resource stronger than those who don't, and, eventually, "ethical" people will be "bred out" of the system.

Citing Hegel's observation that "freedom is the recognition of necessity," Hardin concluded that the only way to avert the tragedy of the commons was to institute a system of coercion that has been "mutually agreed upon by the majority of the people affected." Hardin's language is sufficiently vague on the matter of who would actually be responsible for applying this coercion and how this coercion would be applied. This vagueness leaves space for liberals to argue that averting the tragedy of the commons is the function of government while leaving it to conservatives and libertarians to argue that private associations will form naturally to administer each resource. Regardless of whether the liberals prevail or the conservatives/libertarians do, the result is the same: only groups capable of limiting the freedom of individuals by democratic means can preserve the commons for all.

I am squarely in the camp of the liberals. For me, while Hardin's commons is a sublime metaphor, it doesn't capture the complexity and interdependence of the world in which we now live. The global commons is far too big to be managed locally. In prior decades, we could talk about the water quality in a particular town or the smog in a particular city. We could form ourselves into groups intent on "saving the baby seals" or "protecting the Chesapeake Bay," and devote our energy to those causes. But the baby seals and the Chesapeake Bary are all part of a huge and vastly complex interacting system. Actions taken with respect to the Chesapeake Bay may well have some impact on the baby seals in the arctic, and we cannot leave it to these two groups to worry about that interaction, because if they are working independently on their causes, they may be unwittingly working at cross-purposes.

I believe that only a powerful government can tap the financial, intellectual, technical and coercive resources necessary to coordinate and address all of these problems simultaneously. Our challenge as citizens is to keep our government on task while keeping its functions as transparent and as accessible as possible without concentrating tyrannical powers in its hands. Given the damage both parties have done (and continue to do) to our system of governance, this will be no mean feat.

I will be writing periodically about the world as I see it, always informed by Hardin's insight about the tragedy of the commons. I hope that anyone who reads this will take time to think deeply about the issues I raise and find ways to act. We are quickly approaching the point where our global commons will face tragedy. Help me make sure that there is something left for our children.

As always, your comments are welcome.

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