The Perverse Incentives of Obamacare

The Obama administration carefully crafted a piece of legislation that is meant to destroy private insurance and health care over the long-run. Consider how they have created a system of incentives that rewards you for canceling any health insurance you are currently paying for. Yes, that's right, the Obama "reform" makes you better off if you cancel your health insurance.

In normal insurance markets your incentive is to buy insurance before you are ill because pre-existing conditions are not covered. You pay $X per month for protection against conditions that may develop in the future. There is a very strong incentive to purchase insurance prior to such a condition developing.

Obama ends that incentive. Insurance companies will no longer be allowed to exclude pre-existing conditions. So why buy insurance?

Obamacare puts in penalties if you don't have insurance. But the penalties will be lower than the cost of the insurance itself. The money you will save on insurance will not be eaten by the penalties so you win. And, if you do get sick, no insurance company can turn you down for a policy and you're covered again.

Most of the time we aren't sick. Most of the time we pay for care we aren't using as an investment for when we will need it. But under Obamacare you can pay much less now, and still get the rewards later.

Companies that stop providing insurance will pay a penalty for doing so, but again under the cost of providing the care, especially as private rates increase. What alternative exists for Obamacare then? Obviously it will have to get more heavy-handed in punishing people. So the iron boots of government will have to be put on to deal with people who actually act according to the perverse incentives of Obamacare.

It should also be noted that some of the bad consequences of Obamacare have already materialized.

Publicly traded companies are supposed to announce any significant moves in their value. As the Wall Street Journal noted: "Black-letter financial accounting rules require that corporations immediately restate their earnings to reflect the present value of their long-term health liabilities, including a higher tax burden."

And that is what some companies have done. They announced the anticipated effect of Obamacare on their company. While Obama was claiming the measure would bring down health-care costs the companies that would be paying the bill said their costs would go up. According to the Journal: "AT&T announced that it will be forced to make a $1 billion writedown due solely to the health bill, in what has become a wave of such corporate losses." But AT&T wasn't alone:

On top of AT&T's $1 billion, the writedown wave so far includes Deere & Co., $150 million; Caterpillar, $100 million; AK Steel, $31 million; 3M, $90 million; and Valero Energy, up to $20 million. Verizon has also warned its employees about its new higher health-care costs, and there will be many more in the coming days and weeks.

The Democrats were hoping for some more time to pass before they were discovered to have lied to the public about costs. So they are hopping mad. Democrats "announced yesterday that they will haul these companies in for an April 21 hearing because their judgment 'appears to conflict with independent analyses, which show that the new law will expand coverage and bring down costs.'" Of course, we can all get more for less. Well, that was the promise.

The Journal asks: "Should these companies have played chicken with the Securities and Exchange Commission to avoid this politically inconvenient reality? Democrats don't like what their bill is going in the real world, so they now want to intimidate CEOs into keeping quiet."

The Journal notes precisely what the Democrats were trying to do:

Gradually introduce a health-care entitlement by hiding the true costs, hook the middle class on new subsidies until they become unrepealable, but try to delay the adverse consequences and major new tax hikes so voters don't make the connection between their policy and the economic wreckage. But their bill was such a shoddy, jerry-rigged piece of work that the damage is coming sooner than even some critics expected.

Nobel laureate Gary Becker called the Obama legislation "a bad bill" which actually doesn't address any of the real weaknesses of American health care but "adds taxation and regulation. It's going to increase health costs—not contain them." But Becker thinks it will become difficult to repeal this bad legislation because "interest groups group up around it."

Politicians, especially Democrats, are quite capable of setting up systems of perverse incentives. It has happened repeatedly. Of course, when things get screwed up the politicians claim it was caused by private business, not by their actions. They are blameless, always, because they are looking out for our interests. If you believe that,let me know, I have a bridge I want to sell real cheap.

Bailout promises, Mao's famine and bad incentives.

I suspect a lot of people are shocked by the blatant falsification of statistics by various government bureaucrats, at different levels, which gives a pretense to the Obama administration to claim their stimulus package created, or saved, jobs. I'm not sure why people are surprised at all.

One of the problems with the bureaucratic system of management is that such self-reporting is often the criteria used to measure "success." The problem is that the incentives for the bureaucrats are such that they pushed to fudge the numbers, in whichever direction necessary, to please their superiors. In the bureaucratic system pleasing the overlords, is necessary for advancement. So it's best to tell them what they want to hear.

Equally important is that government agencies, which report successes for their programs, often get showered with additional funding. Additional funding means more conferences for the top bureaucrats, often at resorts with very nice beaches. It also means more funding for pay increases and benefits.

There are numerous reasons why it is "helpful" to distort the facts in a way pleasing to those who have power over you. Often the distortions are small, just an attempt to show something "positive," but as the distortions move up the bureaucratic ladder they accumulate and the distortions grow.

A prime example of this, and the disastrous consequences that can follow, is found in Jasper Becker's book Hungry Ghosts. Becker's book is about the great famine in China from 1958 to 1962, where it is now estimated that 30 million people starved to death. And bureaucratic incentives to distort information had a lot to do with it.

Mao was a moron, plain and simple. He believed that various Marxist principles could be used to produce bumper crops. Since the Maoists said that solidarity of the people made the people stronger, then the same applied to grains. Thus growing grains tightly packed together would make them stronger, not destroy crops. This was just one area where the Maoists tried to apply "scientific Marxism" to the physical laws of agriculture—applications that failed over and over.

So these experiments were dismal failures. But such failures are not enough to lead to a famine. Other factors come into play. One such factor was the fear of the dictator. Mao's ideas failed but no one wanted to tell him. Tyrants could easily confuse the message with the messenger. So the incentive was to lie.

Local bureaucrats, instead of admitting that crops had been reduced, decided to write reports claiming that crops had increased. Those reports went to the superiors. The superiors, not aware of how much of the report was bluster, combined these exaggerated reports together. And they, thinking the reports were accurate, saw no harm in making them look even better by increasing the crop yields. And so it went. As the "data" accumulated it appeared that scientific Marxism was a success in agriculture. The top echelon of Mao's China got reports that made them very happy.

Desperate for hard currency the Chinese officials decided to take advantage of their bumper crops and sell them outside China. So they confiscated a large section of what crops did exist for export. This meant that food was scarcer at the local level as the farms were depleted of their stock to fill the quotas for export. A year goes by and the next set of reports have to be prepared. Again no one wanted to be the first to prick the Maoist bubble. Nor did anyone want to report they had failed, not when everyone else was apparently so successful, as the reports clearly indicated. So once again they took the figures from the year before and added a bit to them. And the process repeated itself.

At the top levels of the government Communist officials received more data, carefully collected from across the country, indicating an even larger crop than the year before. So the quotas for export were increased.

More food was confiscated. But a problem arose. You can't confiscate food that doesn't exist. Authorities scoured the countryside and couldn't find the crops that supposedly existed. The conclusion they drew was a simple one: the farmers were greedy, counter-revolutionaries who had obviously hidden the bumper crops. They were attempting to sabotage the revolution. So the officials, convinced the farmers had hidden food somewhere confiscated all the food they could find—which was actually all the food there was. The farmers had no hidden stocks, the data was wrong. The cumulative effect of lots of small distortions produced a massive error which resulted in the deaths of millions.

We saw a similar sort of bureaucratic distortion when the Bush administration looked at the "reports" on weapons of mass destruction in Iraq. Intelligence agents, dealing with lots of unknowns or information that could be interpreted in various ways, tended to interpret the data with the wants of their superiors in mind. This tended to bias everything in one direction with no one wanting to be the odd man out. This was especially true with Bush officials who tended to be disciplined if they contradicted what the President wanted. (A humorous example of this process can be found in the film The Tailor of Panama.)

Can't the same thing be found in private industry as well? Yes, but to a much more limited degree. For instance I know a publication which faked its circulation figures, claiming numbers double the actual figures. Advertisers paid on the assumption that the number of responses would be higher than they actually were. The advertisers who could accurately measure the results tended to drop their ads. But some businesses had no method of determining results from their ads and they tended to stick around as advertisers where the others didn't.

The difference is in how results are measured. The private sector has a "bottom-line" which tells the superiors everything they need to know. If something is working it shows up in increased profits. If it isn't working it shows up in reduced profits or losses. (For a good exposition on the differences between profit management and bureaucratic management see Bureaucracy by von Mises.) The more a business is able to use the "bottom-line" the harder it is to fudge the reports according to the benefits that accrue to those making the reports.

Government tends to shun profit management and has no bottom-line. Attempts to quantify the data are distorted by the incentives of the system. The net result is that even well-meaning superiors find it difficult to make rational decisions because the information they use has been distorted by the system.

While Mao could be a tyrant I don't think the evidence indicates the starvation was intentional—as opposed to Stalin's planned starving of the kulaks in the Ukraine. Eventually the situation got so bad that someone told Mao the truth and the situation changed. However, Mao's moronic Marxism was sufficient to create the crisis and the bureaucratic system made the situation worse by distorting the facts. And Mao was clearly a willful killer who ran a system that murdered millions intentionally as well as unintentionally.

The key point is that such distortions are systemic in nature. They are built into the structure of the bureaucratic model of management. They are not determined by the motives of the bureaucrats per se. Good people, facing bad incentives, are still likely to screw up. Bad people, facing good incentives, are likely to do good things. The progressive Left errs by thinking intentions are critically important while incentives are a minor issue. Many of the errors of the socialist Left are derived from this one fallacy.

By the way, this exposes the errors conservatives make about the Left as well. They assume the bad results, inherent in the system, are the result of immoral or evil motives by the Left. Typically that is not the case. A second, similar error of the conservatives, is that they buy into the Left-wing assumption that motives matter. So the Right will claim that putting "moral" people, "Christians" or "conservatives" into the system will change things. It won't. In the past, before they were taken over by theocrats, the Republicans claimed that putting "businessmen" into office would give us business-like management. That wasn't possible. The problem is not personnel but incentives built into the system.

Reality: It's a bitch.

Previously I mentioned that I was at the Atheist Alliance International meeting in Burbank recently. As expected a good number of people were dyed-in-the-wool Lefties of one statist variety or another. But a goodly number of people were libertarian—which is what I would expect.

In the course of the conference I meet and talked to dozens of people and have previously recounted some of the arguments I heard from the Left. But there was one argument I wanted to leave for a discussion by itself because it was so interesting. And, actually, it wasn’t really an argument, just a statement.

The discussion began with our Left-leaning friend saying that we need stringent government regulation of, well just about everything, in order to protect the Little Guy from rapacious Big Boys with lots of power. To do this we had to give the State lots and lots of power to counter-balance the Big Guys out to hurt the Little Guy. It’s a pretty standard argument from the Left.

My reply was what I would call Libertarianism 101. Simply put, I argued that history has shown that when the State is given such powers it is rarely used to protect Little Guy. Instead Mr. Politician conspires with Big Guy to use the new fangled powers in order to make life for Mr. Politician and Big Guy better at the expense of Little Guy.

As I’ve repeatedly said, the concentration of power does not help the powerless but those who already have power to grab the new power. Politicians need the support of powerful people, not little people. So they automatically turn to the Big Guys for financing. Senators don’t go out and have dinners at McDonald’s with the local gardener. They go to expensive restaurants with corporate executives and work out the “new” legislation that will protect the Little Guy. Since Big Guy and Mr. Politicians need each other, and the Little Guy only has to be fooled at the ballot box—which is a relatively easy thing to do—the end result is not favorable to Little Guy.

At this point my nemesis presented a very sad reply. And I don’t mean sad as in pathetic, I mean sad as in depressed or despondent. He actually looked sad as well. His voice got soft, as if he didn’t really want to say what he was about to say. He sort of shook his head slightly and lamented: “Yes, but it shouldn’t be that way.” And that was the end of his discussion. He bid me farewell and moved on. “Yes, but it shouldn’t be that way.”

What surprised was the lack of willingness to defend his fundamental argument that centralized power could be beneficial to the poor and the powerless. Instead, he just lamented that life is not the way he would like it to be and said, “It shouldn’t be that way.” He was acknowledging that it is that way; just saying it ought not be so. Which is like wishing to fly, despising gravity, and then stupidly flapping your arms in the hopes of getting airborne. He did not seem willing to abandon his premise that state power can be used in the way he thought would be good. He just lamented that reality is not the way it ought to be. If wishing were sufficient we’d all live in Candyland, walking streets of gold and be young, good looking, wealthy and smart. But reality loves to interfere with our wishes. Wishing isn’t enough.

Creating new powers and controls merely creates new ways in which the powerful can oppress the powerless. These new powers simply won’t be in the hands of the poor or the powerless. It doesn’t work that way. It doesn’t matter what I want, what you want, or what any of us want. Reality is what it is. Today’s New York Times illustrates this point perfectly with two stories.

The first article mentions the astronomical levels of debt that Obama has imposed on future generations of Americans. The new debt for the year is $1.4 trillion. That is equal to 10% of the entire economy. The Times says the debt is currently $12 trillion and that the Feds estimate it will rise by $9 trillion over the next decade. Anyone want to bet it will rise much, much faster than that? In essence, Obama is bankrupting America, just like Bush was doing, only more so.

The second story looks at one major cause of the new debt—the bailout packages. Politicians said they had to have billions in bailouts for Bankers to help the Little Guy --- it’s always to help the Little Guy, of course. But justification for policies and the results of policies rarely coincide. The Times notes that while people are struggling to pay debts and keep their homes “much of Wall Street is minting money—and looking forward again to hefty bonuses.”

The Times explains why: “It may come as a surprise that one of the most powerful forces driving the resurgence on Wall Street is not the banks but Washington.” Ah, excuse me, but YOU WEREN’T PAYING ATTENTION. This is NOT a surprise but precisely what I expected. This is the rule of power: expanding power always benefits those who have power already, not those who don’t. Maybe this is a surprise to the staff of the New York Times, as they seem relatively naïve on the role of incentives in politics and markets. But this sort of “surprise” is precisely what advocates of depoliticized, free markets predict will result from such policies. The Times says that the measures taken by the politicians “helped set the stage for this new era of Wall Street wealth.”

And the concentrated forms of wealth on Wall Street are only becoming more concentrated.

A year after the crisis struck, many of the industry’s behemoths — those institutions deemed too big to fail — are, in fact, getting bigger, not smaller. For many of them, it is business as usual. Over the last decade the financial sector was the fastest-growing part of the economy, with two-thirds of growth in gross domestic product attributable to incomes of workers in finance.
Now, the industry has new tools at its disposal, courtesy of the government.

I am sorry the New York Times is surprised that the policies they helped promote had results contrary to what they wanted. Ignore reality at your own peril. The Left does that in economics all the time. I guess the Times would say: “Yes, but it shouldn't be that way.” Yep, reality is a bitch, so maybe you ought to start paying attention to it.

The real class warfare: responsible vs irresponsible

The U.S. Congress is about to pass new legislation, the effect of which is to punish anyone who has credit cards and uses them responsibly. If you pay your bills on time you will be hurt. If you are irresponsible, or perhaps even intentionally dishonest, you will be rewarded.

Congress, in its infinite wisdom (read loads of sarcasm into that statement) wants to limit the penalties on irresponsible credit card users. The New York Times reports that one result of the legislation will be the “reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.”

One official of the American Bankers Association said: “Those that manage their credit well will in some degree subsidize those that have credit problems.”

Lest you think the Times has sympathy for responsible people, worry not. They have not given up their political bias in favor of irresponsibility and profligacy. In the sidebar they even have a section called “Room for Debate” which invites readers to debate the issue of “Should responsible card users be penalized for paying off their monthly balance?” That the Times even thinks there is “room for debate” on that issue speaks volumes.

The paper also quotes a “consultant” who claims that responsible cardholders were “making out like a bandit” because they didn’t pay annual fees and collect points for travel and other perks.

Remember that each time you use the card with a company that company pays a percentage to the bank for the privilege of having your credit backed by the bank. Individuals who don’t pay their debts on time actually take money from card companies. So, of course, banks charge them more.

But in the world of the perverted morality of politics responsibility has to be punished and irresponsibility has to be rewarded. If you think the Obama/Democratic government is waging war on the rich think again. They don’t give a damn if you are rich or poor. They merely care if you are responsible or irresponsible.

If you are irresponsible you will be favored no matter your level of income. Obama proved that by pouring trillions of dollars into the coffers of some of the wealthiest corporations in America but only if they had proven to be irresponsible. In fact, the more irresponsible they were, the more they were rewarded. Under Obama’s bailout schemes the only people punished were the responsible corporations.

Why is this sort of perverse politics so popular with the ruling elite? I suspect there are two reasons.

First, most of these clowns have never run businesses or, if they had, they ran them badly. George Bush was a lifelong failure in business; Obama has never been in business. He never paid out a salary to another person with his own money. This is sadly true from many politicians.

Second, politicians identify with irresponsible financial management. They understand it; they practice it on a daily basis when they draw up the budget. They understand spending more than you have, wasting money in irresponsible ways, lying to creditors, and cheating people out of the money they have earned. That’s how they run the country and they simply can’t conceive of any other way of managing things.