With so much riding on the pending bailout, I would ask Congress to hold a hearing this weekend, with two people testifying: Ben Bernanke and Roger Cole. Cole is head of the Federal Reserve’s Division of Bank Supervision and Regulation, fondly known as “soup and reg.”

Here is how mortgage securities markets could affect good borrowers:

1. The securities lose market value.
2. The banks mark the value of their securities to market. This eats into their capital.
3. The banks have to cut back lending to good borrowers in order to comply with capital requirements.

To help good borrowers, you have to intercept one of these three steps. The Paulson plan and all its variants are an attempt to intercept step 1. Getting rid of mark-to-market accounting is an attempt to intercept step 2. Easing up on capital requirements is an attempt to intercept step 3.

The Paulson plan is awful. For one thing, I don’t see how the Paulson plan can really kick in for several months, because it will take that long to figure out implementation. With capital forbearance, you could have new rules up and running within a week.

Getting rid of mark-to-market is not what I would want if I were a bank regulator. That’s why I would want Cole at the hearing. Ask him: if you had to choose between relaxing capital requirements and getting rid of mark-to-market, which would you choose? If he disagrees with me, then go with what he says. Incidentally, there is an op-ed in today’s Wall Street Journal that says we should keep mark-to-market accounting.

The question for Bernanke is this: if the Paulson plan is defeated, can he do enough with capital requirements and other tools to keep money flowing to good borrowers, particularly small business? If the answer is “yes,” then I think there is a credible alternative to the Paulson plan. Wall Street may not like it, but the public will be protected from a Great Depression scenario. If Bernanke says he doesn’t have the tools to free up bank lending, and if he thinks that things are going to really freeze up for good borrowers, then I guess we have to default to the Paulson plan.

[Cross-posted from EconLog]

Hold a Hearing is a post from Cato @ Liberty - Cato Institute Blog

For not doing a bailout:

1. We don’t need to bail out Wall Street to protect Main Street. All we have to do is make sure that sound borrowers, especially small businesses, have access to credit. Banks can do the job, although regulators may have to reduce capital requirements.
2. The mortgage securitization industry is brain-dead. If it does not revive on its own, we should not spend taxpayer money trying to resuscitate it. The industry right now is a focal point of rent-seeking, but it has little relevance to the economy as a whole.
3. The stock market seems to want a bailout. While I hope for higher stock prices, I think that public policy needs to take into account more than just daily fluctuations in the Dow. In 1971, the market gave a huge thumbs-up to wage and price controls, which turned out to have damaging economic effects that persisted for years.
4. There is no reason to rush. President Bush wants to ram this through without deliberation, because that is how he operates. The Democrats want to act without deliberation, because putting the financial sector under government control is what they want. The rest of us would be better off if the issue were carefully debated first.

[Cross-posted from EconLog]

Some Talking Points is a post from Cato @ Liberty - Cato Institute Blog

I am interviewed by Russ Roberts.  The topic is health care economics, based on my book Crisis of Abundance.

The interview was slightly censored.  In trying to explain how we ended up with third-party payments for health care, I suggested this analogy:

Suppose we were 20-year-old guys who hung out together, and one of our friends was down on his luck with women.  He’s really depressed about it.  We decide–not necessarily the brightest idea–to hire him a prostitute.  We don’t want him to know she’s a prostitute, so we all chip in and pay her, tell her to meet our friend at a bar, and make him feel better about himself.

Next morning, we ask him how it went.  He says, “Great.  I really feel better about myself.  In fact, I’m going to see her again tonight.”

As friends of the guy, we look at each other and realize that he will be devastated if he learns the truth.  So we chip in again and pay the prostitute to make our friend feel better about himself.  This keeps happening day after day, and eventually maintaining our friend’s illusion about his love life gets to be really expensive.

Similarly, free health care is an attractive illusion.  It’s just gotten to be really expensive to maintain the illusion.

Even though that analogy was cut, I hope the podcast is interesting.

Health Care Podcast is a post from Cato @ Liberty - Cato Institute Blog

Maggie Mahar reports on how things are going in Massachusetts, with its much-touted health reform:

Uninsured citizens earning more than 300% of the poverty level are expected to buy their own insurance. Here, the state hoped that 228,000 of its uninsured citizens would sign up. So far, just 15,000 have enrolled. Apparently, they’ve done the math and decided that it would be cheaper to pay the penalty. But their premiums are needed to keep the program going. If more in this group don’t sign up, it is not at all clear how the state will be able to continue subsidizing the poor.

Yesterday’s first speaker, Robert Blendon, a professor of Health Policy in Harvard’s Department of Health Policy and Management, talked about what Massachusetts experience might mean for the national health care debate: “Massachusetts is the canary in the coal mine,” Blendon declared bluntly. “If it’s not breathing in 2009, people won’t go in that mine.”

See also this post, where Mahar writes,

But the underlying reason people in Massachusetts have become accustomed to such lavish care is not that they are naturally more demanding than people in other states. Rather, high consumption of care is driven by the fact that the state is a medical Mecca, crowded with academic medical centers, specialists and the equipment needed to perform any test the human mind is capable of inventing.

In December of 2005, in The Weekly Standard, I wrote

if I were going to pick a state in which to attempt an experimental health care financing reform, it would not be Massachusetts. Massachusetts, with its outstanding medical schools and world-class hospitals, is rich in the suppliers of premium medicine, and abundant supply has been shown to drive up usage.

Mahar and I are almost exactly in alignment on health care policy. We agree on the diagnosis–Americans make extravagant use of medical procedures with high costs and low benefits. Mahar and I only differ in our prescriptions. Go figure.

Go read both of Mahar’s posts.  There is more worth reading than what I excerpted.

The Massachusetts Canary is a post from Cato @ Liberty - Cato Institute Blog

My review of Shannon Brownlee’s new book says,

The point is that getting the advantages of McMedicine may not be a matter of sheer collective will, as Brownlee would have it. Instead, it might require radical deregulation of medical licensure and practice regulations.

I like the fact that her book often inverts the usual story of villains and victims in health care. For example, lawyers and doctors who fight insurance companies for approval of a desperate cancer therapy turn out to be wrong.

Overtreated is a post from Cato @ Liberty - Cato Institute Blog

In the Wall Street Journal ($),  Mitt Romney seeks to distance himself from HillaryCare II:

The new plan is slated to cost $110 billion a year. And to pay for the new entitlement — a tax hike. That in turn will slow down the economy and make the cost of her system grow even higher. By contrast, both the reforms I led in Massachusetts and the federalist reform plan I recently proposed do not raise taxes or increase spending.

…I chose an individual mandate only after we had done our best to reform state insurance regulations — lowering premiums by as much as 50%.

Let’s be clear here: My plan in Massachusetts worked very differently than Sen. Clinton’s plan would. First, we worked to reduce the burdens of regulation. The legislature insisted on more coverage mandates and regulation than I would have liked, but even so, less regulation has resulted in much lower premiums.

Governor Romney believed at one point that he was going to do all these things–cover the uninsured, simplify regulations, lower costs, and avoid increased government spending.  And that is what he remembers having done.

Reality is a bit different.  Health insurance in Massachusetts is still highly regulated.  If anything, regulations are stiffer.  Some people who already had health insurance found that under the new law their health insurance policies do not meet the mandate!

Finally, the cost of the plan proved far higher than Romney projected.  This makes the claim about no increase in spending or taxes untenable.

Romney remembers a plan that was in his dreams.  What was actually feasible, enacted, and implemented is rather different.

Romney’s Selective Memory is a post from Cato @ Liberty - Cato Institute Blog

Atul Gawande writes,

Little of what the geriatricians had done was high-tech medicine: they didn’t do lung biopsies or back surgery or PET scans. Instead, they simplified medications. They saw that arthritis was controlled. They made sure toenails were trimmed and meals were square. They looked for worrisome signs of isolation and had a social worker check that the patient’s home was safe.

How do we reward this kind of work? Chad Boult, who was the lead investigator of the St. Paul study and a geriatrician at the University of Minnesota, can tell you. A few months after he published his study, demonstrating how much better people’s lives were with specialized geriatric care, the university closed the division of geriatrics.

“The university said that it simply could not sustain the financial losses,” Boult said from Baltimore, where he is now a professor at the Johns Hopkins Bloomberg School of Public Health. On average, in Boult’s study, the geriatric services cost the hospital $1,350 more per person than the savings they produced, and Medicare, the insurer for the elderly, does not cover that cost. It’s a strange double standard. No one insists that a twenty-five-thousand-dollar pacemaker or a coronary-artery stent save money for insurers. It just has to maybe do people some good.

En passant, he writes, “We cling to the notion of retirement at sixty-five—a reasonable notion when those over sixty-five were a tiny percentage of the population, but completely untenable as they approach twenty per cent.”

So it seems that Medicare is letting down the elderly when it comes to geriatric care.  And Social Security is untenable.  Who would have thought that government would make mistakes?

As We Age is a post from Cato @ Liberty - Cato Institute Blog

He might as well say “shoot me” when he writes,

focus on the incentives facing the 250 million Americans who have health insurance, not on the estimated 47 million who don’t. 

He’s right, but the terms of the debate are not going to change.  So he is just setting himself up as a target for scorn.  More here.

Michael Cannon Dons a Bullseye is a post from Cato @ Liberty - Cato Institute Blog

David Hogberg has joined the blogosphere with Health Hog.  One of his first posts links to a debate between David Gratzer and Jonathan Cohn.  Gratzer’s opening salvo mentions a book by Robert J. Ohsfeldt and John E. Schneider, which is among three books reviewed here.  Gratzer writes,

Robert L. Ohsfeldt and John E. Schneider factor out intentional and unintentional injuries from life expectancy statistics, concluding that this non-injury group of Americans outlive similar groups in other countries.

I’ve often wondered what would happen if you did this sort of calculation.  I can’t say that I am entirely shocked that if you adjust longevity data for things like murders or car accidents, the U.S. comes out ahead.

New Health Care Reading is a post from Cato @ Liberty - Cato Institute Blog

Shannon Brownlee writes in the New York Times,

Sure, aggressive treatment is reducing mortality and improving the quality of life for some patients. Sometimes it even cures. But for many others, the cancer machine offers only marginal benefits at best, and providers push screening and aggressive treatment in part because they have nothing else to give, but also because it’s profitable. How much of the money we spend on unnecessary or futile cancer treatment might be put to better use searching for real advances?

Her forthcoming book is titled, Overtreated: Why Too Much Medicine Is Making Americans Sicker and Poorer.  Meanwhile, Jonathan Cohn writes

Every day, millions of hard-working people struggle to find affordable medical treatment for themselves and their families – unable to pay for prescription drugs and regular check-ups, let alone for hospital visits. Some of these people end up losing money. Others end up losing something more valuable: Their health or even their lives.

His book title is Sick:  The Untold Story of America’s Health Care Crisis–and the People Who Pay the Price.

Europeans probably will love Cohn’s book, which apparently will reinforce their impression that Americans fall down dead in the streets every day because we don’t have enough socialized medicine.  Brownlee’s book also apparently will take an anti-capitalist slant, blaming evil doctors and hospitals for overtreating patients.

The moral of the story is that whether you are being overtreated or undertreated, it’s the fault of the evil capitalist system.  Still, if Cohn and/or Brownlee want to campaign on a platform of “Your health care stinks.  It’s time to replace your health insurance and your doctor with a government programm,” I think they may run into opposition.

Dueling Book Titles on Health Care is a post from Cato @ Liberty - Cato Institute Blog

At Cato’s Health policy summit this weekend, Susan Chamberlin kept challenging us to come up with an 8-second sound bite on health care. I had nothing better to do on the plane ride home than to work on the puzzle. Here is what I would propose:

The prescription for better health care is more freedom to innovate, not remote-control surgery from Washington.

I was struck by the fact that some states have sensible policies in some areas. In fact, I can imagine other soundbites along the following lines:

Health insurance costs less in [pick a state, say Kansas or Oklahoma] than in Massachusetts, thanks to fewer dysfunctional regulations.

People who have diabetes or other expensive chronic conditions do not have to worry about health insurance if they live in [pick a state], thanks to the state’s high-risk pool.

Consumers today can find information to help them select the best health insurance plan, the best doctor, and the best treatment alternative, thanks to services available on the Internet.

If you want to see even faster progress on solving problems with our health care system, try more deregulation to encourage more innovation. Try encouraging more competition, not a government monopoly. We need responsible consumers making informed choices, not bureaucratic diktats.

Eight Seconds on Health Care is a post from Cato @ Liberty - Cato Institute Blog

Kate Bundorf and Mark Pauly examine the issue of the affordability of health insurance.

health insurance is unaffordable for 10.5 percent of adults aged 25-64. For the whole sample, using the poverty line as a benchmark, 71 percent of the currently uninsured population could afford health insurance coverage. Increasing the definition of affordability to family income exceeding three times the poverty threshold, the proportion of “uninsured afforders” declines to 28 percent.

Bundorf and Pauly also present a number of estimates defining affordability thresholds according to the proportion of individuals with similar characteristics who purchase insurance. Using a definition of health insurance as affordable if the majority of people in similar circumstances purchase coverage, the authors find that health coverage was affordable to between 59 and 66 percent of the [un]insured, depending on the characteristics used to define individuals as similar. Using the threshold that 80 percent of similar households purchase insurance, they find that around 25 percent of the uninsured could afford coverage based on peer comparisons.

This is empirical support for the phenomenon that I once described as health insurance do-nots.

Health Insurance Do-Nots is a post from Cato @ Liberty - Cato Institute Blog

I attended the Conservative Summit sponsored by National Review this past weekend.  There was a strong grassroots hankering for smaller government. Ironically, the event showcased a number of leaders and ideologies that Michael Tanner shows in Leviathan of the Right to be the source of the problem with the conservative movement.

In part as a reaction to this Summit, I came up with a Request for Ideological Comment.   It starts to articulate a strong, positive vision for limited government.

1. We weave a thread of self-reliance into a sturdy fabric of interdependence. By respecting the law, we reinforce impersonal justice. By competing intensely and fairly in an impersonal global market, we raise our standard of living through specialization and innovation. By upholding Constitutional principles for limited government, we sustain our individual freedom…

A total of ten principles are stated.  I would love to have other Cato bloggers give their comments on what I call the IATF RFC.

Taking on Leviathan is a post from Cato @ Liberty - Cato Institute Blog

Robert J. Samuelson writes,

Last year, then-Gov. Mitt Romney made headlines by signing legislation to cover all the state’s uninsured. . . Romney suggested that annual premiums for a single worker might total $2,400. But when insurance companies recently provided real estimates, the cost was much higher: $4,560.

I told you so.

The problem of paying for health-care coverage, which politicians are declaring they have “solved,” is really just beginning. The only way to make zero-deductible health insurance available at low cost is with a large subsidy; how much will depend on negotiations with insurance companies. Only when the size of the necessary tax increase becomes clear will Massachusetts’s leaders learn the laws of arithmetic.

Everyone is asking whether the Massachusetts plan can work in other states.  It seems to me that the only fair assessment is that it isn’t even working in Massachusetts.

The Laws of Arithmetic is a post from Cato @ Liberty - Cato Institute Blog

As noted earlier, today is Milton Friedman Day.  My modest contribution is this essay.

I call this the Fundamental Problem of Political Economy. How do we limit the power that idiots have over us?

One solution, that might be traced to the expression “philosopher-king” associated with Plato, is to hand the reins of government to the best and the brightest. Since the late 19th-century, the Progressive Movement in American politics has championed this approach…

The other way to avoid having our lives run by idiots is to limit the power that others have over us. This is the approach that was embedded in our Constitution, before it was eviscerated by the Progressives. It is the approach for which Milton Friedman was a passionate advocate.

Friedman or Plato? is a post from Cato @ Liberty - Cato Institute Blog

Jacob Hacker writes:

[E]very legal resident of the United States who lacks access to Medicare or good workplace coverage would be able to buy into the “Health Care for America Plan,” a new public insurance pool modeled after Medicare. This new program would team up with Medicare to bargain for lower prices and upgrade the quality of care so that every enrollee would have access to either an affordable Medicare-like plan with free choice of providers or to a selection of comprehensive private plans.

It seems to me that if a plan “bargains for lower prices,” then many providers would prefer not to participate. In that case, “free choice of providers” would require forcing doctors to join.

I was pointed to this plan by Matthew Yglesias, who praised it. I got to Yglesias via Tyler Cowen, who is more skeptical.

I am very pessimistic about the outlook for health care policy. It seems to me that wonks are engaged in a bidding war for politicians, in which the guy with the most hubris (Great health care for all! At half the cost!) wins. 

I think that the best that libertarians can hope for is to see some of these ideas tried in state laboratories and have their outcomes measured against their promises. My fear is that we will get the former but without the latter.

Health Plan Hubris is a post from Cato @ Liberty - Cato Institute Blog

A few things I find interesting the proposed California health plan.

1. Although it mandates health insurance, it envisions high-deductible health insurance policies as satisfying the mandate. Apparently, the thinking is in terms of a deductible of $5000 for an individual, as opposed to Massachusetts, where they think that “high-deductible” is about $1000.

2. It does not create an equivalent of the Massachusetts “connector.” The more one looks at it (see this description, for example), the “connector” is micro-managing individual and small-group health insurance in Massachusetts, leaving the private sector essentially no room to maneuver. The “connector” really ought to be re-named for what it is, a central planner.

3. Funding the plan with a tax on health care providers is interesting. In my new Cato Unbound essay, I write about today’s overly generous health insurance coverage:

For health care providers, insulation is a bonanza. Because consumers are not spending their own money, they accept doctors’ recommendations for services without questioning them and without concern for cost. Faced with an insured patient, a health care provider is like a restaurant catering to convention-goers with unlimited expense accounts. The customer will gladly take the most high-end recommendation and not worry about the price.

The Governator’s plan is to pay for a subsidy to health care consumers by putting a tax on health care producers. Thus, the push for health insurance becomes something other than a pure windfall for providers.

4. The plan explicitly envisions health insurance for illegal immigrants. If you think of that as a humanitarian issue, you may like it. But if you think about it in terms of the incentive it provides to illegally immigrate, it sounds problematic. Also, I am curious as to how the state is supposed to administer a program for illegal immigrants with one hand and enforce immigration laws with the other.

Of course, not all details have emerged, and the legislature has yet to put its imprint on any plan. So it may be premature to comment at any length.

The California Health Plan is a post from Cato @ Liberty - Cato Institute Blog

The AP reports,

Maine’s Dirigo Health Reform Act drew national attention when it was signed into law in 2003, making Maine the first state in recent years to enact legislation aimed at providing universal health care access.

The law, which went into effect Jan. 1, 2005, is designed to contain health care costs and ensure access to health care for all. When it passed in the Legislature, its goal was to insure 31,000 people in its first year and to cover all of the state’s 130,000 uninsured by 2009.

The program has fallen short of its goals — 12,153 were enrolled in the Dirigo Choice health insurance program at the end of October — and was placed under review this year by a Blue Ribbon Commission representing business, insurers, consumers, labor and the state.

The article reports that Maine is considering tax increases among other measures to address problems with its reform.

There is a huge incentive for states to over-promise and under-deliver on providing health care solutions. The most popular programs will be ones that have not been given a thorough trial yet.

State Health Reforms — Do They Deliver? is a post from Cato @ Liberty - Cato Institute Blog

At EconLog, I point to a survey of economists by Robert Whaples.  It seems as though there is a professional consensus on the libertarian side of the issues of free trade, school vouchers, and marijuana legalization.  They also support raising the retirement age for Social Security, which is my favorite libertarian approach on that issue.

However, on health care, Whaples reports that a plurality–almost 50 percent–support universal health insurance.

This got me thinking about what the consensus belief among economists ought to be about health care.  I think it ought to be that government should stop leading people to think that prepaid health plans are health insurance.

In any case, I think more members of the American Economic Association need to read Crisis of Abundance.

We Have Work To Do is a post from Cato @ Liberty - Cato Institute Blog

The Washington (state) Alliance for a Competitive Economy announces a new briefing paper on health care trends.

In 2005, an estimated 54.6 percent of health care was funded by private sector spending, a slight increase from the 54.3 percent reported in 1995. In 2015, private sector spending is projected todecrease to 52.5 percent. While the percent of funding from the private sector remains relatively stable, the source of private sector funds has shifted from out-of-pocket payments to private health insurance. In 1970 out-of-pocket payments made up 33.2 percent of health care spending, decreasing to 12.3 percent ofspending by 2005.

The paper refers frequently to Crisis of Abundance.

An Update on Health Care Trends is a post from Cato @ Liberty - Cato Institute Blog