Friday, September 30, 2011

Sunday, August 28, 2011

Marco Rubio loves America - just not the last 110 years

Florida Senator Marco Rubio is being hyped by many Republicans as the future of the party. He is young, charismatic, and handsome. And who doesn't love Marco Rubio's story? It is inspirational that only fifty years after Marco Rubio's father came to America (in 1960), Rubio was elected as a US Senator (2010). As Rubio explains, "what makes our story so special is that isn't unique. The American Dream is still a reality."

So this week, I quickly checked out Rubio's big speech from the Reagan Library where he decided to lay out his political philosophy (and lay the groundwork for his presidential campaign). The following video encapsulates Rubio's rather bizarre political beliefs:

Wow. Twentieth century government programs (e.g., social security, medicare) were "doomed to fail from the start."

Why? "It forgot that the strength of our nation begins with our people and these programs weakened us a people."

Here's my favorite example of how twentieth century programs weakened us in Rubio's view. "If someone was sick in your family, you took care of them....but all that changed when the government assumed these responsibilities."

A few, very quick reasons why this makes absolutely no sense.
1. Before Medicare, 50% of seniors had no hospital insurance. Let's hypothetically say that a family member "took care of them." They still didn't have access to a doctor - which is usually pretty helpfully when you are elderly and sick.
2. People still "take care of" their elderly family members. They probably spend much less time doing so than in the nineteenth century because the elderly can get assistance from medical professionals. However, ask any baby boomer with sick parents and they will tell you that they supplement the professional medical services by watching after their parents and often times coordinating their treatment.
3. If middle aged people can spend more time working because they are no longer the full-time care takers of their parents, isn't this good for society / the economy? What determines long-term economic growth is the productive capacity of the workforce and having a large portion of your workforce staying home trying to watch after their parents all day would seem to diminish this capacity.

Rubio concludes this segment by stating, "as government crowded out the institutions in our society that did this thing traditionally it weakened our people in a way that undermined our ability to maintain our prosperity."

The American people were weakened in the twentieth century? He provides no support for this claim and it does not even pass a smell test.This is the century when America experienced historically unprecedented economic growth and became the world's pre-eminent super power. This was the century where the American Dream was built: opportunities were opened up to Americans of all income classes, ethnicities, and ultimately races.

Furthermore, the contradiction between Rubio's campaign commercial, praising the opportunities his family had in America in the late twentieth century, and this speech, slamming the twentieth century, is so blatant that it's painful.

Rubio presents himself as a young, charismatic, and forward-looking leader. In reality, he is a reactionary's reactionary. He doesn't just want to undo the actions of the Obama or Bush-43 Administration. He is philosophically opposed to the federal government's twentieth century policies and wants to go back to a time in which America was less prosperous, had higher levels of inequality, and was less powerful.

For those who love America as it is, and not America as it was in 1900, Marco Rubio is a dangerous man.

Thursday, June 9, 2011

Does the National Review have fact checkers?

Michelle Malkin wrote a bizarre hit job on departing Council of Economic Advisors Chairman Austan Goolsbee in the National Review yesterday. She complains that Goolsbee is a professor who does not understand business.

Malkin's criticism makes absolutely no sense. The Council of Economic Advisors was created to provide technical economic advice to the president, and thus the chair position has traditionally been reserved for an economics professor or business school professor. All five of Bush's CEA Chairmen were professors (Edward Lazear at Stanford Graduate School of Business, Ben Bernake at Princeton, Harvey Rosen at Princeton; Greg Mankiw at Harvard, and Glenn Hubbard at Columbia School of Business).

However, what I find more disturbing about the Malkin's piece is this line, "When Goolsbee joined Team Obama, the unemployment rate was around 6 percent." Huh?

A 5 second wikipedia search tells you Goolsbee was confirmed on March 10, 2009. Jump over to the Bureau of Labor Statistics and you'll find that the unemployment rate in March 2009 was 8.6%.

Of course, Malkin did not just accidentally under-state the unemployment rate in March 2009 by 2.6%. It is a purposeful attempt to make it appear as though the economy was not THAT bad when Obama took over.

Does the National Review have fact checkers? There's no answer to that question that puts them in a favorable light.

Tuesday, June 7, 2011

Shorter David Brooks: Don't look at facts to determine future of Medicare

David Brooks' column today in the New York Times is called "Where Wisdom Lives." In the column, he argues that the Medicare debate is actually a proxy for a larger philosophical debate between top-down government control of the economy versus a market-based system. Brooks concludes:

The fact is, there is no dispositive empirical proof about which method is best — the centralized technocratic one or the decentralized market-based one. Politicians wave studies, but they’re really just reflecting their overall worldviews. (emphasis added) Democrats have much greater faith in centralized expertise. Republicans (at least the most honest among them) believe that the world is too complicated, knowledge is too imperfect. They have much greater faith in the decentralized discovery process of the market.
I’d only add two things. This basic debate will define the identities of the two parties for decades. In the age of the Internet and open-source technology, the Democrats are mad to define themselves as the party of top-down centralized planning. Moreover, if 15 Washington-based experts really can save a system as vast as Medicare through a process of top-down control, then this will be the only realm of human endeavor where that sort of engineering actually works.
The bolded sentence demonstrates the problem with Brooks' argument. He is positing that one should not trust "studies" because they only represent preconceived worldviews. However, I would argue just the opposite. The only way to determine which system would be better for Medicare would be to look at empirical evidence, and as I demonstrated in my last post, all the of the statistical evidence points to Medicare doing a better job than private insurance of controlling health care costs.

Brooks' alternative to looking at the specific evidence relevant to Medicare is to make the obvious point that most of the US economy is a market-based system. But Brooks goes too far when argues that there is no part of the economy where a top-down (government) system works. Does Brooks drive on federal funded highways? Is he protected by the US military? Of course. Quite simply, while most services are better provided by a free market, there are a few services (highways, defense, health insurance for the elderly) that the government has proven that is does a better job of providing. Ironically, Brooks is the one relying on his preconceived worldview, not the "study waivers."

I agree with Brooks' column in one regard. The current Medicare debate is about where wisdom lives: careful study of empirical evidence or abstract philosophy.

Monday, May 30, 2011

Paul Ryan's Medicare defense: Draw your own conclusions

Representative Paul Ryan (R-WI) has branded himself as a politician who is honest and wonky. On the first page of a Time Magazine story about him, Ryan told TIME, "For too long, Washington has not been honest with the American people. We owe it to the country to give them an honest debate." Ryan also shares that, "I love the field of economics. I have a knack for numbers."

With the release of his "Path to Prosperity" budget plan and its proposed overhaul of Medicare, Ryan has catapulted himself to the center of the D.C. policy discussion. Under the Ryan Medicare proposal, Americans 55 and under would be forced to leave traditional Medicare (Medicare "fee-for service") and instead receive a voucher payment to purchase private insurance.  According to the Congressional Budget Office, the vouchers will only cover 32% of seniors' health care costs by 2030. The CBO explains that the voucher payments will be unable to cover seniors' health care costs for three reasons. First, the voucher payments will be indexed to the consumer price index, which has risen much slower than the cost of health care insurance over the last thirty years, and thus will decrease in real value. Second, private insurance plans spend more money on administrative costs (and profits) than Medicare. Third, Medicare has lower payment rates to providers than private insurance because Medicare is larger and thus has more leverage with providers than any private insurer.  

Given his reputation as a policy wonk and the controversy generated by his Medicare proposal, I was excited to see that Paul Ryan had created a video to defend his plan. 

Ryan begins the video with one of his favorite themes: honesty.

Washington has not been honest with you about Medicare. Medicare is a critical program which helps seniors achieve health security. But the truth is it’s headed for a painful collapse.
Ryan then lays out the case for his Medicare proposal with a series of statistics, charts, and economic terminology (supply, demand, etc.). Ryan's intended message is that he is wonky and has a series plan.

Here’s why: More than 75 percent of Medicare recipients, which is 35 million people, receive what’s called the fee-for-service insurance plan.

Here’s how it works: A Medicare patient goes to the doctor and receives health care services.  The doctor sends the bill for these services to Medicare, and Medicare reimburses the doctor -- with your tax dollars and borrowed money -- no questions asked.

Ryan begins with his diagnosis of what's ailing Medicare: the fee-for-service reimbursement system. Under fee-for-service, providers (doctors, hospitals, etc.) are reimbursed for each service that they provide. The usual criticism of fee-for service is that it does not take into account the quality of the service provided and that it incentivizes doctors to perform extraneous diagnostic tests for which they can get reimbursed, thus increasing costs.

It is important to note that the fee-for-service reimbursement system is the dominant system not only for Medicare but also for private insurance companies. There are a few private insurers (e.g., Kaiser Permanante) that incorporate quality metrics into their reimbursement system for providers. However, there was a law passed recently that will begin to move Medicare away from the pure fee-for-service system and  incorporate quality metrics. That law is the Patient Protection and Affordable Care Act of 2010, a.k.a Obama-care. Representative Ryan omits this fact, and I'll let readers draw their own conclusions about why he does so.

Next, Ryan explains why the fee-for-service system is detrimental.

First, as you can see, the patient is very disconnected from the cost. We all pay for Medicare, through taxes or, if you’re a Medicare patient, through premiums.  But the true cost is hidden from the Medicare patient because someone else pays the actual bill.  When we pay directly for something, and we know how much it costs, we have a strong incentive to demand the best value.  In health care, we don’t.
Ryan's first critique of fee-for-service Medicare is actually not unique to fee-for-service Medicare at all and is a criticism of all health insurance. If an individual has health care insurance, then they are going to be insulated from much of the direct cost of the health care services they purchase. Once they have paid their premium, the individual has no incentive, other they have high co-pays or deductibles, to worry about the cost of their health care consumption.

The second reason costs are going up and quality is going down is that fee-for-service Medicare insurance has no competition -- so it reimburses all doctors and hospitals the same, even if the quality of the care they provide is poor, and the cost of their care is high.  Meaning that there is little financial incentive for doctors and hospitals to deliver the best care at the lowest price.
This statements contains both factual and logical errors.

1. Fee-for-service Medicare HAS competition. Does Representative Ryan not remember when he said just a minute ago that "more than 75 percent of Medicare recipients" have fee-for-service Medicare?

The other 25 percent have chosen a competitor to fee-for-service Medicare: Medicare Advantage. Here's the simple explanation of Medicare Advantage from wikipedia, "With the passage of the Balanced Budget Act of 1997, Medicare beneficiaries were give then option to receive their Medicare benefits through private health insurance plans, instead of through the original Medicare plan...Pursuant to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, the compensation and business practices changed for insurers that offer these plans ... (the) plans became known as Medicare Advantage (MA) plans."

How could Representative Ryan say that Medicare fee-for-service has no competition when he knows that only 75% of Medicare recipients use it and two laws were passed in the past 20 years to create private sector competition? I'll let readers draw their own conclusions.

2. Even if it were true that Medicare fee-for-service had no competition, that would not be the reason why "Medicare reimburses doctors and hospitals the same." Ryans is blurring two parts of the value chain; he seems to be confused about the difference between insurance company competition and provider competition, e.g., doctors and hospitals. Hypothetically, there could be a country where there is only one insurance company and it creates an algorithm to differentiate provider pay based on health outcomes. There could also be a hypothetical country with a high-level of insurance company competition but where none of the companies differentiate their provider pay.

3. Ryan ignores the "Obama-care" provisions (reference above) that will begin to reimburse some doctors and hospitals at different rates depending on quality. Representative Ryan can send his thank-you flowers to 1600 Pennsylvania Avenue NW, Washington, DC, 20006.

Before presenting his own plan, Ryan attempts to savage Obama's plans to reduce Medicare costs. I will address these attacks after I analyze Ryan's plan.

Here are the key lines of Ryan's plan and his defense of his plan:

Rather than putting the government in charge, our plan provides financial support to help future Medicare patients pay for the insurance plan that works best for them and their families.... 
And insurance providers, competing for patients’ business, will look to lower the costs and increase quality for their services – the way it always works when the consumer is in charge.... 

Who should be making health-care decisions for you and your family?

A government monopoly and a panel of bureaucrats in Washington DC?

Or you?
What Ryan is saying here is astonishing. The entire premise of the Ryan health care plan is that competition between private insurance companies will drive down health care costs. Any casual observer of US health care costs over the last 30 years could tell you that they had skyrocketed and that private insurance companies had failed to keep down health care costs. If I were talking to someone who had lived under a rock for the last 30 years, and thus felt compelled to prove that private health care insurance will not drive down costs, I would point out the following:

1. The CBO analysis of Ryan's plan projects that private insurers will do a worse job than status quo Medicare of driving down costs both because of their higher administrative costs and their smaller leverage with providers.

2. Private health insurance costs have risen faster than Medicare over the last 40 years (9.3% vs. 8.3% annually).

3. Medicare Advantage's private insurers were unable to contain costs as well as Medicare. Remember the 2003 changes to Medicare Advantage's "compensation and business practices?" In 1997, the government planned to pay private insurers the same amount (or slightly less) than the cost of Medicare. The private insurers were having difficulty competing with Medicare because they are less efficient. In response, President Bush put a provision into the 2003 Medicare Prescription Drug, Improvement, and Modernization Act that provided additional subsidies to Medicare Advantage. Thus, the federal government pays 9% more for Medicare Advantage plans than Medicare fee-for-service.

This strikes me as wrong. If private insurers want to provide Medicare services, they should have to compete equally. If the whole conversation is about cutting Medicare costs, then the 9% extra subsidy for Medicare is a logical first step.

Fortunately, President Obama felt the same way and passed a bill (yes, "Obamacare") that will phase-out the 9% subsidy. The second method through which Obama will be decreasing Medicare costs is by altering the fee-for-service reimbursement system (a method that Ryan apparently advocates as well). The independent board that has been created to alter the reimbursement system and harness the new reimbursement system to drive down costs is the Independent Payment Advisory Board, the board of "bureaucrats" which Ryan bashes for a minute of his video. The IPAB can be over-ruled by Congress, but it is true that the IPAB recommendations will be the default compensation system. 

There will be those who will agree with Ryan's argument that they do not want government bureaucrats making health care decisions. However, they should remember that they already have that choice - they can still enroll in Medicare Advantage and go with the private health insurance bureaucrats. However, if Ryan's plan passes, those who prefer the government option will have that choice taken away. Through a sleight of hand, Representative Ryan is taking away choices while claiming to do just the opposite. 

Is Representative Ryan really an honest policy wonk? I'll let readers draw their own conclusions.

Sunday, May 15, 2011

Why I'm long Romney

The conventional wisdom about the 2012 Republican presidential nomination is that the field is wide-open. Nate Silver projects that Mitt Romney has a 27% chance of winning the Republican nomination, which makes the 2012 Republican contest "by some margin, the most wide-open in the modern era on the G.O.P side." Similarly, Intrade currently predicts that Romney has a 26% chance of winning the nomination. According to the Associated Press, Huckabee's announcement, "makes an already wide-open Republican field even more unpredictable." 

This is a case where the conventional wisdom is anything but wise. Far from wide-open, the 2012 Republican presidential contest has a clear favorite in Mr. Romney, who, in my view, has a better than 50% chance of winning the nomination. 

The starting place for any analysis of the 2012 Republican nomination should begin with what I dub the "next-in-line rule." Four out of the last five Republican presidential nominees placed second in the previous primary season (see below for list). If the rule holds, Mitt Romney, the 2nd place finisher ins 2008, should win the nomination.

1980 – Ronald Reagan (Runner-up in 1976 Republican nomination)
1988 – George H.W. Bush (Runner-up in 1980 Republican nomination)
1996 – Bob Dole (Runner-up in 1988 Republican nomination)
2000 – George W. Bush (Son of former President George H.W. Bush)
2008 – John McCain (Runner-up in 2000 Republican nomination)

Because his father had been President, George W. Bush received many of the same advantages that Reagan, Dole, Bush, and McCain earned, such as high name recognition and a strong donor base. It's important to note that both Dole and McCain were both perceived as too moderate by some Republicans and were attacked from their right during the primaries. The historical record shows that the Republicans have chosen to nominate the center-right candidate they know over the hard-right candidate they don't know.  

The two primary objections to Romney winning because he is "next-in-line" are that (1) the Tea Party has fundamentally changed the Republican nominating process so that an outsider is more likely to win and (2) Romney is a uniquely weak candidate because of Romneycare.

(1) Tea Party candidates knocked off establishment Republicans in multiple 2010 Senate primaries. Marco Rubio chased Governor Charlie Crist out of the Florida Senate primary. Christine O'Donnell defeated Representative Mike Castle in the Delaware Senate primary. Sharron Angle defeated former State Party Chairwoman Sue Lowden in the Nevada Senate primary. However, the Tea Party did not beat the establishment across the board. Senator John McCain defeated tea partier J.D. Hayworth in Arizona and Representative Roy Blunt defeated tea partier Chuck Purgason in Missouri.

Interestingly, the races where the Tea Party won were either in small states (Delaware; Nevada) or states where the insurgent candidate was actually able to raise as much money as the incumbent (Marco Rubio in Florida). In the mid-size states (Arizona; Missouri), the tea partiers could not overcome being outspent by the establishment candidate. The lesson for 2012 is that insurgent Republicans are most likely to win where there is a small electorate or they can reach financial parity with their establishment competitor. 

(2) Romney's biggest flaw as a candidate is that he supported a health care bill in Massachusetts that contained all of the elements that ended up in the 2009 health care reform legislation (individual mandate; subsidies for low-income earners, etc.). Health care is one of the issues that most fires up the Republican base and Romney's Massachusetts legislation will cost him votes. 

Yet, both parties have nominated candidates in recent years who were on the wrong side of a major issue for the party's faithful. McCain won the 2008 Republican Party nomination after sponsoring a comprehensive immigration reform bill with Ted Kennedy and John Kerry won the 2004 Democratic Party nomination after voting to authorize the war in Iraq. Romney is following the McCain and Kerry route. He is standing by the initial decision (passing Romneycare; sponsoring immigration reform; voting for the war) while claiming that he actually agrees with his base because of a technicality (a state health care bill is different than a federal health care bill; comprehensive immigration reform is different than amnesty; voting to authorize the war is different that executing a war). So while the Massachusetts health care legislation will hurt Romney, it does not mean that he is "fatally wounded" as Jonathan Chait of the New Republic has argued. 

The objections are strong evidence that Romney will not walk away with the nomination solely on his "next-in-line status" but do not prove that he is doomed. The crucial task, then, is to understand how Romney's strengths and weaknesses will effect him within the context of this year's Republican field and caucus / primary calendar.

The Iowa Caucus and New Hampshire Primary will be the first two elections of the 2012 Republican presidential contest as has been the case since 1972. Every Republican nominee since 1972 has won atleast one of Iowa or New Hampshire (some won both). This is not a coincidence. If a candidate wins both elections, this sends such a strong signal to undecided voters that the candidate walks away with the nomination. If there is a split between the two states, then undecided voters migrate to one of the two candidates and the supporters of other candidates start moving into one of the two camps. 

An advantage for the Romney campaign is that New Hampshire is a great state for him. It neighbors Massachusetts, it has a higher proportion of economic rather than social conservatives, and it is unusually secular. Two recent polls have Romney leading in New Hampshire by average of 26 points (!). Given that Romney will have the most money of any Republican candidate, it seems almost impossible that any competitor would surpass him in New Hampshire.

This means that the only clear path for another Republican to beat Romney is to win the Iowa Caucus. What kind of insurgent candidate is likely to do well in Iowa? Iowans caucus for underdogs who are either social conservatives (ala Huckabee in 2008) or Midwesterners (ala Dole in 1988). With Huckabee out, the current cast of possible social conservatives (Michelle Bachmann, Rick Santorum, and Sarah Palin) will alienate the mainstream of the party. It's Romney's dream to run against one of those three for the nomination. 

There are two Midwestern governors who could win the Iowa Caucuses: Minnesota Governor Tim Pawlenty and Indiana Governor Mitch Daniels. (In my opinion, Pawlenty stands the better chance of the two: he's already declared his candidacy, he's slightly more charismatic, and he didn't work in the Bush Administration.)  If Pawlenty or Daniels were to win Iowa, they would immediately become the "Anti-Romney". The next two elections would be the South Carolina primary, where Pawlenty / Daniels would be favored, and Nevada, where Romney would be favored. As the calendar is currently shaping up, next up would be California and New York and a few smaller states in the first week in February. 

Here's where it gets fun. Under the Republican Party's new rules for 2012, any primary held before April has to allocate its delegates proportionally. A candidate could lose a primary and still get 49% of the delegates. This means that it's going to be hard for anyone to deliver a knock-out punch. Although the primary calendar is not finalized, there are likely going to be around 25 states holding contests in February and March. A two-month slog over delegates will favor the candidate with more money and organization. Romney would have the edge over Pawlenty and Daniels in both categories. Money: Romney is trying to raise $50M by early summer which will blow his opponents out of the water. Organization: Romney is a management consultant at heart and he's already been through this game once. The lesson of 2010 is that the tea partiers want to fight on a small scale with financial parity. Facing Mr. Private Equity in 25 states in two months? Not their cup of tea.

To conclude, the 2012 Republican nomination contest is likely to unfold in one of three ways depending on who wins the Iowa Caucus. (1) Romney wins Iowa and runs away with it fast. (2) A hardcore social conservative (Bachmann, Santorum or Palin) wins Iowa and Romney dispatches them fairly quickly by consolidating the mainstream of the Republican Party; or (3) Pawlenty or Daniels wins Iowa causing a drawn-out nomination fight under terms that favor Romney. 

Until conventional wisdom catches up with reality, I'm going long Romney.