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Once again Robert Laszewski offers a much-needed reality check on the state of the Affordable Care Act. Read the whole thing, but here are few highlights:
1.) About half of the enrollments are coming from people who were previously insured and half are not.
2.) About 15% to 20% of new enrollees are not completing their first month’s enrollment by not paying their premium, according to my marketplace discussions.
3.) The back-end of HealthCare.gov, that reconciles enrollment between the feds and the health plans, is still not fully built and won’t be for months to come.
4.) There is a lot of dissatisfaction being communicated from consumers to insurance company call centers and their agents about the new health insurance plans, particularly compared to the plans people are used to. … But it would appear we shouldn’t confuse someone wanting to buy an Obamacare policy with an average Silver Plan deductible of $2,600, and the likelihood of a narrow network, with the person necessarily being pleased with the product.
5.) What will the 2015 rate increases be? 9.9% There will be some variation in rate actions because the Obamacare enrollment outcome varies considerably among states.
6.) Will any health plans exit the Obamacare exchange markets in 2015? No. The program is so immature at this point that no one’s original strategic calculus over Obamacare has changed. Health plans do not expect Obamacare to be repealed. They expect it to evolve. The current or future Obamacare represents all of the individual and small group health insurance market in the U.S. You can’t be in this substantial market without going along for this ride.
OK, collapsitarians, it doesn’t look like the ACA is going to implode. I think that bit about health insurance companies expecting Obamacare to “evolve” is pretty important. Will ACA opponents decide to take an active hand in that evolution or sit it out waiting for the opportunity to repeal the whole shebang. The latter is highly unlikely, and not just because of the ACA’s economic and financial fundamentals.
In a recent Econtalk podcast, Steven Teles describes how the US political system — separation of powers, the congressional committee system — not only makes it harder to pass simple, direct legislation, but also harder to reform dysfunctional programs:
American institutions as we all learned when we were boys and girls, creates separation of powers, and that separate of powers, a lot of the original theory behind that is that it would constrain government. You would keep government from acting, because it would create all of these veto points. And in fact it does, and we’ve actually multiplied veto points on top. Our committee system within each branch of Congress has some extra veto points because we’ve got multiple committees.
You might think that should just make it harder to do stuff. [But these veto points operate] more like toll booths, where the people who are at these particular veto points are naturally interested in just stopping things. Usually what they are interested in is extracting a toll and saying if you want to get past the toll, here’s the price you have to pay. And the price you have to pay in many cases is leaving everything we’ve already got in place, because those toll-takers are connected to interests who are invested in existing arrangements of government. And so this separation of powers designed to actually control the government is also simultaneously made it hard to undo or re-do aspects of government once they are already in place.
So what would Obamacare reform look like? Avik Roy has outlined a fairly simple and straightforward program: (a) deregulate the state exchanges, while capping subsidies; (b) slowly shift Medicare patients into the exchanges; (c) Let more people buy insurance on their own rather than through their employer; (d) move Medicaid patients into the exchanges. And as I have mentioned several times before, the Clayton Christensen Institute’s “Seize the ACA” study offer one possible route toward deregulation.
My AEI colleague Mark Perry recently posted a brief 2007 speech given by Nobel economist Thomas Sargent to graduates of Cal-Berkeley. It’s basically a dozen economic observations. Here is No. 4: “Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.”
That observation provides a useful lens through which to examine news, via the Wall Street Journal, that enrollment in plans providing college student debt forgiveness “has surged nearly 40% in just six months, to include at least 1.3 million Americans owing around $72 billion, U.S. Education Department records show.” And those numbers are headed higher.
Remember, everybody responds to incentives. And it doesn’t take a Nobel economist that maybe, just maybe, students and schools might pay even less attention to costs if debt can be forgiven. As it is, according to the WSJ, federal data show tuition and fees are up more than 6% a year on average in the past decade, more than 2 1/2 times inflation. And between 1982 and 2013, published tuition and fees at public four-year colleges nearly quadrupled in real terms. As AEI’s Andrew Kelly predicted back in 2012, ” … barring some sudden leveling off in college prices or significant growth in incomes, the costs of loan forgiveness will grow.”
So let’s change the incentives. If a student defaults on a loan, require the college to cover some share of that amount. Both parties should take into account the potential return on investment of school and major choices. (Better data is a necessity here.) Beyond that, how about diversifying the way students can pay for college? Last week two Republicans, Sen. Marco Rubio and Rep. Tom Petri, introduced legislation that would set basic standards for income-share agreements. Kelly describes ISAs in a WSJ op-ed he co-wrote about the Rubio-Petri plan:
Enter income-share agreements ( ISAs ), which are essentially equity instruments for human capital. Investors finance a student’s college education in return for a percentage of their future income over a fixed period. ISAs are not loans and there is no outstanding balance. If students earn more than expected, they will pay more, but they also will pay less—or nothing—if their earnings do not materialize.
The growth of ISAs would create more educational opportunity and reduce risk for students pursuing higher education. ISAs make financing available to students regardless of background without a government guarantee or subsidy. They would also alert students to high-quality, low-cost programs, as investors will offer the most favorable terms for programs with a reasonable price tag that help graduates succeed in the workplace. This, over time, could curb tuition inflation, and lower the cost of college. But most significantly, ISAs protect students from the severe downside risk of traditional student loans. …
In Oregon, state legislators in 2013 introduced a “Pay it Forward” plan that would allow students to attend public colleges tuition-free in exchange for 3% of their income after graduation. During the past decade, a handful of organizations have sprouted up to unite investors and students. For-profit groups such as Lumni, Pave and Upstart, as well as nonprofits including 13th Avenue, currently finance students through ISAs.
As with physicist Stephen Hawking’s “A Brief History of Time,” economist Thomas Piketty’s 700-page “Capital in the Twenty-First Century” is a bestseller destined to have a steep purchased-to-read ratio. For many on the left, it will be enough to simply know that Piketty’s grand theory of capitalism affirms their preexisting worldview: capitalism drives inequality ever-higher, superrich CEOs don’t deserve their fat paychecks, massive taxes on income and wealth are necessary to avoid an inegalitarian death spiral. For many on the right, it will be enough to simply know that Piketty is a French inequality researcher who teaches at the Paris School of Economics. Let the eye-rolling commence.
But Piketty is a first-rate scholar whose magnum opus is well worth reading, whatever your ideological inclination. His thesis is straightforward. At its center are observations and forecasts about the return on capital, economic growth, and the relationship between the two. Some economists, such as Paul Krugman and Martin Wolf, think Piketty’s probably got the story right. Others, including AEI’s Kevin Hassett, Tyler Cowen, and Joshua Hendrickson, take the other side of the trade.
Yet even if Piketty is wrong, there is reason to believe technology and globalization might sharply increase immobility, as well as boost income and wealth inequality–and lead to long-term wage stagnation for the vast majority of workers. The good news here is that many of the most realistic responses — even Piketty thinks his own end-game policy agenda is utopian — are intrinsically good ones. Since slow economic growth worsens inequality, we should want to pursue policies that might boost birthrates (tax relief for parents) and innovation (remove regulatory barriers to entry).
Indeed, Piketty has said as much. If capital ownership is becoming too concentrated, then we should try to broaden it (universal savings accounts) and turn more workers into owners. Cowen highlights “deregulating urban development and loosening zoning laws, which would encourage more housing construction and make it easier and cheaper to live in cities such as San Francisco and, yes, Paris.” And, of course, both primary and secondary education need a strong dose of disruptive innovation to meet the changing needs of students and workers.
If policymakers start giving such ideas greater thought, then Piketty’s book, right or wrong, will have performed an immensely valuable service.
Competition spurs innovation, even in low-tech industries. Take shaving, for instance. The Wall Street Journal reports that Procter & Gamble has created a new flexible razor mounted on a ball bearing. Sounds to me like a version of a Dyson vacuum. Anyway, BloombergBusinessWeek explains how a new competitor is forcing both a product and business model change:
But here’s the true innovation: Gillette’s new razor will use P&G’s current blades, a total departure from the notorious razors-and-blades model that has characterized the segment since Civil War beards went out of style the first time. The razor has typically been just a cheap vehicle to sell expensive blades, locking customers into a proprietary platform. … But that brilliantly simple business model may finally have worn thin, thanks to e-commerce startups such as Dollar Shave Club and Harry’s. With a heavy dose of humor, some cheap Asian suppliers, and sharp customer service, these companies started convincing consumers that razors were a commodity, not high science. In October, Dollar Shave Club had 330,000 members and gathered another $12 million in venture capital.
Meanwhile, Gillette’s revenue from its grooming segment—mostly razors and blades—dropped in its last fiscal year for the first time in five years. … Which is exactly why Gillette’s new ball-bearing device is so fascinating. Its launch suggests those cheap blade subscription services have been trimming the brand’s business. Gillette has even cobbled together a razor-blade subscription service of its own via retail channels such as Amazon.com and Drugstore.com.
One way government stymies entrepreneurs, particularly low-income ones, is through illogical and burdensome occupancy licensing laws. These laws and regulations are more about limiting labor supply and competition than ensuring the public’s health and safety. Cronyism meets cartelism.
As documented by the Institute of Justice, an emergency medical technician is required to get an average of 33 days of training. Yet in a 2012 analysis of license requirements for more than 100 low- and moderate-income occupations across America, IJ found 66 jobs with greater average licensure burdens than EMTs, including interior designers, barbers, cosmetologists, and manicurists. The average cosmetologist, for instance, spends 372 days in training.
These requirements to spend months in education or training, take exams, and pay fees make it “harder for people to find jobs and build new businesses that create jobs, particularly minorities, those of lesser means and those with less education.”
In a piece over at Vox, Evan Soltas, working off research by Alan Krueger and Morris Kleiner, notes that 30% of US workers are now covered by licensing schemes. As union membership has gone down, licensing has increased — with an interesting effect on inequality:
Connecting the stories of unions and licensing makes sense. Both are institutions workers created to raise wages — and occupational licensing seems about as effective as unions, raising wages by about 15 percent relative to what similarly-skilled workers earn in states where they’re not protected by licensing from competition.
Yet there’s something unions did that occupational licensing doesn’t, and that’s reduce inequality, Kleiner and Krueger find. Whereas unions tend to push up wages at the bottom and restrain them at the top, compressing the wage distribution, there’s no such effect for occupational licensing. Wage dispersion within a given trade is not effected by licensing.
In other words, the most successful workers will find that occupational licensing recreate the wage gains that unions once provided. But licensing seems to do little to help the bargaining power of the most vulnerable workers.
View related content: Pethokoukis
Slow economic growth since the Great Recession has been devastating for employment, middle class incomes, and federal and state budgets. Worse, many economists are predicting slow growth for the next generation. A number of policies — from tax and immigration reform to more innovation friendly regulatory treatment of the health, energy, finance, education, and communications sectors — could help launch a much needed new boom.
But another often-overlooked but persistent drain on the economy also needs attention. Intellectual property (IP) was written into the Constitution and ever since has been a key to U.S. inventiveness and entrepreneurship. Over the years, however, the system has broken down in a number of ways. An overworked Patent and Trademark Office issued too many patents of questionable quality and in markets (software is the prime example) where the very idea of patentability is questionable. An explosion of low quality patents ignited an explosion of litigation, and today the legitimacy of IP itself is under assault
Real intellectual property embodied in true inventions and innovations is crucial to our economy. But faux IP, embodied in obvious and overly broad claims and backed by fierce litigation, is triply bad. It discourages small innovators and new market entrants. It artificially boosts prices and thus harms consumers. And it gives true IP a bad name, undermining a foundation of our knowledge economy.
Great catch here by one of my favorite Wall Street economists, Michael Feroli of JPMorgan:
One of the principal strengths of the usual weekly earnings report is the demographic details it contains regarding wage growth. In particular, the 90-10 ratio compares earnings of workers in the top decile with those in the bottom decile and is sometimes used as a proxy for income inequality.
When the series began in 2000, workers in the top earnings decile earned 4.4 times as much in a usual week compared with workers in the bottom decile. The 90-10 ratio then steadily increased until it topped out at 5.3 in 2012Q3. Since then the ratio has come back down to 5.0 last quarter.
As we noted last year (“Is income inequality near a turning point?”) income inequality tends to be countercyclical, with wages exhibiting greater inequality in bad times and less inequality when the business cycle improves. With labor markets continuing to firm and slack being reduced in most measures, it is reasonable to expect further compression of the 90-10 ratio in coming quarters.
View related content: Pethokoukis
Airbnb, the home-rental company, is a great story about the Internet economy and disruptive innovation. It and Uber are examples of new firms that have, as BloombergBusinessWeek puts it, “upended traditional business models and allowed creators of content to connect directly with their audience.”
But disrupters make enemies of powerful disruptees, the incumbent firms in their space. Privately-held Airbnb just raised $450 million from a group led by private-equity firm TPG. The company wants to expand globally and add more services for travelers. And here is one other thing, according to the WSJ, that it want to do with the dough.
Airbnb also needs financial ammunition to battle a powerful hotel industry and scrutiny from regulators, and to cover costly damages from thefts and vandalism. Hotels argue that the company’s rentals unfairly skirt lodging taxes and should be held to the same fire codes and other regulations. Regulators, meanwhile, are concerned about safety, oversight and tax collections.
So whose side will government be on, that of consumers and disruptive startups or entrenched interests?
View related content: Pethokoukis
The good news about the current economic recovery is that it is continuing. GDP is rising, jobs are being created. Of course, the pace has been quite slow. From the WSJ:
The National Bureau of Economic Research, the semiofficial arbiter of business cycles, judges that the U.S. economy began expanding again in June 2009, just over 58 months ago. That means the current stretch of growth, in terms of duration, is poised to drift past the average for post-World War II recoveries.
Yet after almost five years, the recovery is proving to be one of the most lackluster in modern times. The nation’s 6.7% jobless rate is the highest on record at this stage of recent expansions. Gross domestic product has grown 1.8% a year on average since the recession, half the pace of the previous three expansions.
So is it a case that slow-but-steady wins the race? The history of US expansions suggests slow growth actually raise the risk of recession. There is less cushion to absorb economic shocks. Sputter speed often turns to stall speed. Research from the Federal Reserve finds that that since 1947, when year-over-year real GDP growth falls below 2%, recession follows within a year 70% of the time.
Of course there is no reason to accept that this is the best the US economy can do — especially given tax and regulatory policy more focused on subsidizing incumbent players than promoting competition and innovation. And as I say today over at National Review, monetary policy is hardly optimal for meeting whatever potential GDP growth is right now.