Monthly Archives: December 2008

Now is not the time for a Pigovian gas tax

Wrote this a little while back. The macro policy bits in the second to last paragraph may or may not remain my opinion in the light of some of the data that Mankiw has posted here. Let’s just say my thinking is… fluid on the more Keynesian bits I’ve referenced. I’m going to have to read the whole paper (PDF) in the near future.

Several weekends ago, the Washington Post editorial board came out in favor of a Pigovian gas tax. A guest op-ed in the New York Times advocated essentially the same thing. For those unfamiliar with the concept, a Pigovian tax is a fee levied on a particular good or service designed to reduce consumption of that good or service to compensate for a negative externality. Even if the revenue raised from the tax is returned to the public in the form of an income subsidy, it has a real tendency to reduce consumption of that particular good or service, even though an individual has experienced no real drop in income. (They have not dropped to a lower indifference curve.)

In the case of gasoline, the tax has many reasons: pollution generated by the combustion of fossil fuels isn’t accounted for because clean air never enters a market system, therefore it has no market price so we treat it as free. (Obviously clean air has value even though we don’t buy or sell it.) Another externality is the US’s reliance on foreign oil, often provided by otherwise hostile nations who derive their economic power from US petrodollars. There are several other, more wonkish reasons for desiring a Pigovian gas tax as well.

In general, I consider myself a bandwagon fan of the Pigou club. I agree with their aims, and Pigovian taxes have demonstrated a remarkable ability to meaningfully compensate for externalities otherwise unaccounted for in a free market system. However, now is not the time to institute such a tax. At a time when the federal government is considering a large-scale stimulus package that certain Keynesians think needs to be in the neighborhood of US$600 billion to have any chance of working — a figure that jives with China’s US$585bn package — the tremendous drop in gas prices is equivalent to a US$318 billion stimulus package that Uncle Sam doesn’t have to ultimately borrow from China or sovereign wealth funds to put into play in the here and now.

This trumps any marginal environmental benefit that might be gained by instituting a Pigovian tax at this moment in time.

Recession economics suggest that when all normal tools of correction have been tried, the government should increase spending and/or cut taxes. Trying to close a budget deficit while in the middle of a recession will only exacerbate the economic turmoil, and you run a very real risk of pushing a recession into a depression. (Though a nation’s long-term stability obviously requires fiscal responsibility, which the US has been lacking in recent years.) Raising taxes takes money out of consumers’ pockets, and cutting government spending tends to lead lead to lost jobs. Obviously lost jobs and decreased consumer buying power are undesirable. Doing nothing can cause the recession to deepen, and doing too little is no better than doing nothing at all. The question isn’t whether we need a stimulus package, the question is how big it needs to be. Therefore we should take what the burst petroleum speculation bubble has given us, and let it ride until the current economic crisis has passed.

It would have been better for the WaPo and NYTimes to have published these pieces back in the spring and summer — not in the middle of a recession. During the Democratic primary, Senator Clinton suggested rolling back the federal gas tax, which was a pretty bad idea. Ironically, if we still had $4/gallon gas prices today, her ideas might make more sense, except that a temporary reprieve of the relatively small federal gas tax wouldn’t amount to very much. However given petroleum’s relatively low cost right now, rolling back the gas tax temporarily wouldn’t amount to much in the way of meaningful consumer relief. ($31.46 billion on the generous side — an amount in the same ballpark as the recent Citigroup bailout.) When the seas are calmer, then we should discuss nifty tricks like Pigovian taxes and other consumption taxation vehicles as part of a responsible long-term fiscal policy.

Now is not the time to balance the budget. While there will always be arguments over timing, it seems obvious to me that instituting a Pigovian gas tax today — or even this year — isn’t in the US’s, or the world’s best interest. Let’s revisit this idea sometime in 2010. Hopefully by then, we’ll have weathered the worst of this recession.

Massachusetts: a less than perfect healthcare model

I will have a large writeup on real, honest-to-God ways we can reform healthcare in this country without resorting to re-distributionist tactics in the next couple of days. No hand-waving. No pie-in-the-sky. I promise. But until then…

By Frank Micciche from the New America Foundation/Providence Journal:

439,000 people have acquired health insurance since the reform became law — an astonishing 9 percent increase in coverage at a time when the national rate increased by one-half of 1 percent.

Nearly 200,000 of the newly insured acquired private, unsubsidized coverage, mostly through their employers.

Written another way: “More than half of the individuals are subsidized with taxpayer money.”

Libertarians will have a field day with the other piece of puzzle: many individuals would rather pay the fine associated with forgoing the mandatory medical insurance than pay the premiums. Why? The fine costs less. Many healthy people simply don’t want to buy health insurance. The original projections for the number of unsubsidized signups ended up being wildly optimistic:

Massachusetts’ financing challenge emerges from its success in covering the state’s neediest residents. Enrollment in the fully subsidized Commonwealth Care program has been higher than expected, while enrollment in the unsubsidized Commonwealth Choice plans has been lower than anticipated. Therefore, costs to the state have risen dramatically.

Micciche spins it another way:

The state’s success enrolling lower-income households in the subsidized “Commonwealth Care” program has driven overall costs above original projections, but the actual cost per person covered is lower than expected, as is the average premium.

From an economic standpoint, enrolling lots of lower-income households is not success unless it is offset by sufficient numbers of unsubsidized enrollees.

Obviously it follows that the average premium is lower than anticipated because the majority of enrollees are subsidized and therefore pay lower premiums.

This isn’t rocket science econometrics, folks.

In the fiscal year before passage of health-care reform, Massachusetts spent $710 million to reimburse hospitals and community health centers for unpaid bills. 81 percent of these costs were incurred by individuals without insurance.

Now we spend that money getting these people the insurance they need so when they go to the ED, they aren’t “uninsured”. Instead we buy these people insurance with taxpayer money so we don’t have to spend taxpayer money reimbursing hospitals directly.

What’s not mentioned is that this is good for the hospitals. A lot of “free care” ends up not being reimbursed at all, meaning hospitals have to eat the costs of treating those who cannot afford to pay. The upside for hospitals is that now that these folks have insurance — subsidized though it may be — hospitals can get reimbursed for services they provide that wouldn’t have been reimbursed in the past. It will be interesting to see if there’s an effect on the number of hospital closures and bankruptcies going forward from here.

Costs aside, all agree that sporadic treatment of the uninsured through emergency rooms and clinics is much less effective medically. The commonwealth took on the problem by diverting much of its uncompensated care pool dollars into subsidies to buy private insurance by lower-income individuals and families. Quarterly costs for free care have subsequently dropped 40 percent.

From one money hole to the next. Yes, that has “sustainability” written all over it. Payments to hospitals have dropped by 40%, and that’s a good thing. Except that that money went to the Commonwealth Care program instead. Instead of being red ink in one set of books, it’s red ink in another.

Clearly there’s a difference between red ink and politically-acceptable red ink. At the end of the day, though, the same people end up paying the piper:

The subsidized insurance program at the heart of the state’s healthcare initiative is expected to roughly double in size and expense over the next three years – an unexpected level of growth that could cost state taxpayers hundreds of millions of dollars or force the state to scale back its ambitions.

State projections obtained by the Globe show the program reaching 342,000 people and $1.35 billion in annual expenses by June 2011. Those figures would far outstrip the original plans for the Commonwealth Care program, largely because state officials underestimated the number of uninsured residents.

Back to Micciche:

And the individuals who acquired private insurance now receive coordinated, cost-effective care that will improve overall health outcomes and reduce the need for more expensive late-stage intervention.

An oversimplification. Many of the patients that are now insured — both subsidized and unsubsidized — cannot find primary care physicians because the program didn’t even attempt to solve one of the major problems with healthcare today: there aren’t enough practicing primary care physicians to handle the influx of new patients. Why? Because being a PCP isn’t a financially attractive proposition. Attempts to alter the landscape of our medical system are continually undercut by talk of reducing Medicare reimbursements to primary care physicians — the very people who will bear the brunt of that manufactured demand. This, in turn, sends the wrong signals to medical students weighing a career in primary care as opposed to a more lucrative specialty.

This dearth of PCPs isn’t unique to Massachusetts, either.

Look, I’m all for increased access to healthcare when it makes sense, and I don’t think ED overusage and overcrowding is sustainable or desirable. I know that health outcomes are worse when non-emergent cases are seen in the ED. ED care is also inherently more expensive. In short, you get less bang for more bucks — and it potentially endangers those who are at the ED for real emergencies by diverting the limited resources to non-urgent cases.

I would like to think that everyone in this country can have their own primary care doctor, but I know that our infrastructure cannot support it. I am not a Darwinian capitalist. I don’t hate poor people. But I do know what is sustainable and what isn’t.

It worries me that if the nation looks to Massachusetts as some kind of prototypical model to be copied, we’re going to be manufacturing big problems, because coverage is only a superficial issue.

Healthcare coverage is not the same thing as healthcare access, even though it is politically expedient to conflate the two concepts.

Universal health coverage will manufacture healthcare demand in dramatic fashion, and the existing healthcare infrastructure isn’t equipped to deal with the kind of patient influx that that kind of universal program would create. We don’t have the human capital to meet that demand. We need to work on our healthcare infrastructure before we dump millions of new patients into the system overnight.

The most interesting thing that strikes me when you look at these numbers is what they say about real demand. Demand for universal health coverage by those that can afford to pay for it is less than our models predict. Even by making health insurance mandatory and enforcing it with a fine, many people are still opting out; they find that their money is better spent in other ways.

Maybe we need to revisit our models and (certainly) our cost projections.

China isn’t as interesting as the mainstream media makes it out to be

Reading this old post by Fred, and it nudged something that I’ve been meaning to talk about for a bit: China. There’s lots of talk in the mainstream media about how wonderful China is, and how quickly they’re growing. Indeed this is all very true, but in the long-run China is a dead end unless they change the foundations upon which their economy is run.

China’s primary strong points are its natural resources and abundant cheap labor.

Natural resources

Natural resources are pretty self-explanatory. However the more deeply you think about them, the more questions you uncover. Today, China lags behind even the United States in being environmentally-friendly. We talk a lot about sustainability and carbon footprints — ideas China is largely ignoring. They’re financing their growth today at the long-term expense of their environment, and ours — a great deal of the smog that collects in the LA basin comes from China. To their credit, China experimented with a “Green GDP” — an idea I hope to more fully explore in the next month or so with a full-length article for Ars — but later abandoned the idea because the cost of the damage they were doing to their environment was politically unacceptable. (And frankly, those numbers were absurdly optimistic anyway.)

Cheap labor

Labor is China’s best resource right now. As the second most populous country, but with an abysmal per capita GDP, China has the perfect recipe for abundant cheap labor. And this is what American manufacturers have been exploiting for quite a while. Unfortunately, while labor is a good way to get your foot in the door as a world power, it’s a piss poor way to maintain that economic power.

Unless you start reinvesting some of this handsome revenue with an eye on long-term viability, you go somewhere quickly, and then just as quickly sputter to a halt. Right now, India has far more economic potential than China because they are reinvesting in their population in the form of education and infrastructure on a scale that China is not. Twenty years ago, India had virtually nothing in the way of infrastructure, education, and therefore no clear plan for long-term economic success. Obviously, they’ve turned that around, but they’ve had a political advantage in that they’re a democracy.

Part of China’s long-term problem is politics. The politics of suppression and lack of freedom severely hurt your ability to produce in the long-run because you cannot invest in education in a meaningful way. On Thanksgiving, I wrote that I was grateful for the Internet because it enables me to have access to huge amounts of information that I would otherwise be ignorant of. China’s firewall is effectively keeping out subversive information which is seriously damaging their ability to grow. It’s not just the firewall itself, of course. You need schools that are strong in math and science and social sciences and literacy. The problem becomes, then, that the more educated your population, the less likely they are to lie down passively while you trample basic freedoms. Education brings understanding brings curiosity brings resentment brings change. You can’t maintain the status quo and continue growing at the same time.

There’s more to China than its cities. While much ado is made over conditions for Chinese factory workers, these conditions are still much better than their agrarian compatriots. (Though obviously not great.) Would a Chinese farmer acquiesce to a such an incredibly low standard of living artificially imposed from the top down if he were educated?

Not in the long run. When China begins the wholesale education of its people, and begins systematically opening up and becoming more free, then it will have a real future, like India. Until then, they remain a one-trick, relatively uninteresting pony.