"Of course, tax cuts for everybody is going to generate more for people that are paying a lot more. I mean that's just the way it is."
I've been explaining this fact to anyone who would listen for a long time. I even made this calculator to help visualize it. Any tax cut in any tax bracket necessarily gives more to the rich than to anyone else. This is even true when we cut the lowest marginal tax rate: the rich also pay taxes on income in that bracket, so they will receive the largest reduction of anyone from a reduction in the tax on that bracket.
Ok, obviously Bush was trying to defend rather than criticize his own "broad-based" tax cut plan. But in doing so he highlights how ridiculous it is. If you really wanted an across-the-board tax cut that benefits everyone equally, the only way you can pull that off is by tying any cut with an offsetting increase in the top marginal tax rates, so that the disproportionately large reduction in taxes the rich get on their first $400,000 of their income is made up by an offsetting increase on their income over $400,000.
AP posted this story this morning titled "Audit finds slipshod cybersecurity at HealthCare.gov," criticizing security vulnerabilities in the system used to administer the federal Obamacare exchanges. Every media outlet under the sun re-posted it word-for-word:And still otherstried to re-post it word-for-word but screwed up.You won't find the source in the AP story or any of the copy cats, but it is about this audit by the HHS Inspector General's office published (in redacted form) on 21 September 2015. (By the way, the report is exactly 4 pages long and half of that was just the title so I don't know why it took AP 3 days to cover it.)
Except, the audit did not find "slipshod" security at HealthCare.gov.
There was something screwy about all this coverage because the AP published a piece that, while not verbatim, was nearly identical to this one back in September 2014. By an accident involving a local news affiliate, Charles Gaba from the esteemed acasignups.net pointed me to the previous story here. That prompted me to chase down the HHS Inspector General's audit, no thanks to AP who failed to properly source their article.1 It turns out that the audit actually had the opposite to say about HealthCare.gov: security there is great.
The report released on 21 September 2015 was the formal writeup of an audit that the HHS Inspector General's office had conducted from August through December in 2014. In other words, this is the same audit as the AP covered in it's previous story in September 2014, and that's why the two AP stories are identical--they are literally talking about the exact same audit. The first AP story was based on a preliminary report produced by the HHS Inspector General's office about the preliminary findings in their security audit of MIDAS, a database system that HealthCare.gov and insurers use to store users' information to allow them to buy insurance through the HealthCare.gov interface. The new story is based on the formal write up of the audit (which is short because the actual technical details of the vulnerabilities were redacted to avoid giving hackers any ideas) conducted a year ago.
But here's the thing. The main reason for this new report is in fact to say that all of the security vulnerabilities have been fixed to the satisfaction of the HHS Inspector General's security team. The final line of the report:
"We have since reviewed the supporting documentation and verified CMS's remediation."
In otherwords, the point of the new report is to say that cybersecurity at HealthCare.gov is now excellent. That's the only news here. But none of the News is covering it that way.
1. See what I did there, AP? It's called a hyperlink. It turns out that when you are writing about a thing on the internet, you can "link" to that thing and then users can click it and be redirected to that thing. You do this by typing what's called an "anchor tag" into the HTML code, which looks like this <a href="[insert url here]">[insert display text here]</a>.You should try it sometime.
You may have heard of Martin Shkreli, the CEO who tried to jack the price of a medication to treat AIDS patients up to 50 times what it is currently. Shkreli's comically evil plot aside, the part that makes this most surprising is that the drug, Daraprim, is a 62 year old generic that in principle, any company could compete with him to produce. As Dan Diamond reports, this is an increasingly common phenomenon where a firm buys up all of the makers of an old generic drug, and then jacks up the price to make enormous profits. Why doesn't someone enter the market and undercut the price?
Both Diamond and Kliff allude to a basic economic theory. Theory predicts that when we're on the increasing-returns to scale portion of the production function, the market tends towards monopoly (you may have heard of increasing-returns referred to as "economies of scale"). That's because at increasing returns, which ever firm is producing more faces a lower marginal cost of production, meaning they can undercut price and drive a competitor out.
Generally speaking, production functions all have the same basic shape. There are increasing returns to scale at low levels of output--where increasing production would lower marginal cost--and decreasing returns to scale at high levels of output--at some point, producing more will actually drive up marginal costs rather than lower them. If you have a bunch of factories operating at the increasing-returns portion of the production function, then you could cut costs by closing some of the factories and increasing production at the remaining factories. If those factories are owned by different firms, then you'd expect an increasing-returns industry start consolidating into fewer firms. Conversely, at the high end of output, if each of these factories is operating at the decreasing returns portion of production, then presumably the firm could cut costs by building more identical factories and reducing output at each of the existing factories. In other words, we'd expect fragmentation and new entrants into decreasing returns industries. For the most part, equilibrium should adjust until we're right at the linear-returns sweet spot in every factory.
But there is one exception. What if there's not enough demand? It is possible that the number of goods you'd have to produce to reach the linear-returns bliss-point exceeds the quantity that consumers will buy at that price. Such an industry will consolidate until there's only one firm or factory producing the good, and even then will still be on the increasing-returns portion of the production function. And once it has a monopoly, that firm can charge the profit-maximizing, monopoly price, because the threat of droping the price all the way down to marginal cost will keep out any potential entrants (since the monopolist would be producing more than the entrant and thus have lower marginal costs, the entrant cannot match this threat price).
It turns out that highly-effective generic drugs for rare conditions are uniquely profitable in this way. Daraprim, for example, only has about 10,000 users. Moreover, the number of users doesn't change much at all with price, meaning not only is the profit-maximizing price sky-high, way above costs, but that demand will never exceed the increasing-returns portion of production so there's zero potential for an entrant to compete on price even though the current price is way above marginal cost.
I got the impression in undergrad that most people think of economies of scale as a good thing. We like the feeling of saving money by buying more! But in fact it has some very very bad economic properties, as Martin Shkreli has illustrated perfectly.
What is the solution? There are a couple proposals floating around. The government could force these producers to sell at cost--there's a legal argument to be made that the federal government has this power now under the Bayh-Dole Act (Bayh and Dole do not agree). These are generic drugs, so there's nothing stopping the government (except maybe congress) from simply producing the drugs themselves, or perhaps contracting with a firm to produce them at cost. Basically, all of the proposals I've heard involve strong government action. Anyone have other ideas?
Side note: the theory is basically the same whether it's about marginal cost or average cost. Even if we are on the rising portion of the marginal cost curve, if average cost is falling (eg high fixed costs), market tends towards concentration in the same way. The largest firm can undercut the others until the competitors are unable to cover fixed costs and are forced to shutdown. Only major difference is that average cost operates on the extensive rather than intensive margin (see generally: firm shutdown conditions).
Obviously, most people under the ACA are going to pay more most months than they would without insurance--that's how insurance works: you pay a premium that is equal to the average monthly payouts, plus a bit extra to compensate the insurer. But, this is still supposed to make you better off, as the decrease in risk and/or increased access to healthcare increases your well-being by more than the monthly premium, on average. And Pauly, Leive, and Harrington do find that
"Subsidy-eligible persons with incomes below 250 percent of the poverty threshold likely experience welfare improvements that offset the higher financial burden."
However, close to half of the people affected by the mandate weren't better off:
"even under the most optimistic assumptions, close to half of the formerly uninsured (especially those with higher incomes) experience both higher financial burden and lower estimated welfare."
That's not quite what was supposed to happen. The argument for the mandate was adverse selection; under a basic adverse selection the optimal level of coverage is not 100 percent but rather the proportion for whom willingness-to-pay for insurance exceeded the marginal cost of insuring them.
It has always seemed to me that much of the ACA is about redistribution rather than strict pareto-improvements. Broadly speaking, the goal of redistribution is to take from the well-off and give to the less fortunate. "Well-being" is a multi-dimensional beast but two of the most important dimensions are income and health--you want to redistribute from rich to poor, and from healthy to sick. Every developed country, to varying degrees, engages in redistribution along both of these dimensions.
The desire to redistribute explains some of the key features of the ACA. For example, we didn't merely impose a mandate to buy health insurance, which by itself would address the narrow efficiency problem of adverse selection, but also imposed a "community rating" rule which by itself has the opposite effect as the mandate, increasing the welfare costs of adverse selection. This policy choice can only be explained by a widespread desire to redistribute from the healthy who would otherwise have faced lower premiums to the sick who would have had much higher premiums. But we didn't just redistribute along the health dimension--the ACA also provides huge income-based subsidies to buy health insurance. Partly, the subsidies are there to further reduce the problem of adverse selection, but that alone can't explain why the subsidies are strictly income-based. In fact, the ACA engages in quite a bit of income-based redistribution as well as health-based.
In a redistribution scheme, it is not unreasonable to have a situation where a majority of people are somewhat worse off. Once you've exhausted the potential for pareto-improvements, the only way to help the neediest members of society is to make others a little worse off. However, forcing the well-off to buy themselves health insurance is a rather goofy way to help either the sick or the poor--why not just take the money and give it to the sick and let everyone decide for themselves if they want insurance? A lot of this comes down to the fact that the US doesn't have a very robust income-based redistribution regime, so for political reasons much of that has to happen in a less efficient form through healthcare markets.
But as Cowen highlights, the ACA is especially goofy in that much of the redistribution is confined to within the new individual market--even though people with employer-sponsored coverage are generally both wealthier and healthier. We have community rating within large employers and within the new individual market, but there's no mechanism to redistribute between each of these pools. Once again, we are hard up against another political constraint--any measure to redistribute must not redistribute from the politically powerful classes, mostly those who have employer-based coverage or Medicare. The "Cadillac tax" on high-end employer-sponsored health plans is one of the few ways in which the ACA does redistribute from these classes, but it keeps looking less and less likely that the tax will ever come to pass--most recently, Hillary Clinton has endorsed repeal of the tax.
Cowen closes with a plea for improvements from within the system (as opposed to another ideological "repeal" of the whole thing). I have a couple ideas here, but will leave those for future posts. In the mean time, submit your ideas in the comments!
