Wikipedians . . . are obsessed with popular culture and less equipped to document the high-brow. The 711-word entry on nouvelle vague filmmaker Claude Chabrol, for example, is much less impressive than the 1867-word article on Transformers-director Michael Bay. . . . [T]he real tragedy of the Wikipedia method is that it reduces intellectual contributions to such granular units that writing a 2000-word entry on Chabrol in one sitting feels like painting the ceiling of the Sistine Chapel. And if you do go to such lengths to improve the site, you do not [...]]]> A recent article in the Boston Review by Evgeny Morozov laments the influence of Wikipedia. I found this passage a particularly interesting take on the epistemology (and ecology) of the web:

Wikipedians . . . are obsessed with popular culture and less equipped to document the high-brow. The 711-word entry on nouvelle vague filmmaker Claude Chabrol, for example, is much less impressive than the 1867-word article on Transformers-director Michael Bay. . . . [T]he real tragedy of the Wikipedia method is that it reduces intellectual contributions to such granular units that writing a 2000-word entry on Chabrol in one sitting feels like painting the ceiling of the Sistine Chapel. And if you do go to such lengths to improve the site, you do not want the bureaucrats—who may know nothing about Chabrol—to judge your contribution. There is something unappealing about the value system of a project that prizes, say, movie reviews quoted from college newspapers over elaborate entries in the authoritative Schirmer Encyclopedia of Film, simply because the latter does not have an easy-to-link Web site.

The Google fetish, it should be noted, is not ideological, but practical. Since Wikipedia’s editors are bombarded with editing tasks—one study estimates three new edits every second—they cannot investigate every entry thoroughly. They are constrained by what can be discovered readily—by Google. But most human knowledge, probably, still lies outside of Google’s reach.

The passage reminds me of an exchange between Sergey Brin and Ken Auletta recalled by the latter on the Leonard Lopate show. Brin asked Auletta why he didn’t just self-publish his book on the web, doing an end-run around publishers. “Who would pay my advance?,” Auletta asked. “How could I support myself for the 18 months it takes to write the book?”

While Brin saw the world of publishing as too-confining, Auletta was in effect opting out of another form of discipline—information location tools that highlight the most accessible content. One key question now is whether the free-cology of Google, Wikipedia, and unpaywalled sources will become its own world of knowledge, creating its own reality unmoored to traditional journalism or books. Auletta might worry that such a dynamic could unleash a Gresham’s Law scenario for knowledge, where the cheapest-to-produce drives out quality content like his. But hard-pressed netizens may well respond: “How am I going to pay for books like yours? How can I support myself when I need to pay $27.95 for every book I want to read?”

X-Posted: Madisonian.

As Congressional committees have begun to specify exactly how “competition” among insurers would lower costs, they’ve realized that we need to do a lot more than increase regulatory scrutiny and add insurers to the mix. Rather, just as Medicare took care of elderly persons unlikely ever to be profitably covered by private insurers, a new option is needed to address the needs of impoverished or sick citizens [...]]]> It’s now official—even Senate leaders are attaching a public option (albeit one with an opt-out) to their proposed health reform bill. Dan Balz of the WaPo asks “What brought the public option back to life?” While Balz focuses on the chess game of Washington politics to explain the public option’s resurgence, I detect deliberative democracy at work.

As Congressional committees have begun to specify exactly how “competition” among insurers would lower costs, they’ve realized that we need to do a lot more than increase regulatory scrutiny and add insurers to the mix. Rather, just as Medicare took care of elderly persons unlikely ever to be profitably covered by private insurers, a new option is needed to address the needs of impoverished or sick citizens unlikely ever to pay profitable premiums to Aetna, Cigna, and their ilk.

Why wasn’t this apparent earlier? I think that closer scrutiny for a proposal to repeal the “antitrust exemption” for insurers has led to more serious consideration of what competition can and cannot do in the health care industry. As antitrust expert Tim Greaney explains, “the Supreme Court has narrowly interpreted McCarran-Ferguson requirement that only the ‘business of insurance’ is exempt; hence insurers’ actions vis a vis providers are not exempt.” Lack of antitrust enforcement—and the market competition it’s supposed to bring—can’t fully explain insurers’ failures here. Some commentators believe that application of antitrust laws to physicians and hospitals in the mid-1970s may even have spurred the development of a “medical-industrial complex” capable of displacing professional norms with profit-driven practices.

Mere promotion of competition, without more, also creates other dangers. Enforcing antitrust laws aggressively against insurers, while failing to balance that effort with similar scrutiny of providers, could lead to even higher health care costs. Do we really expect piecemeal antitrust enforcement, played out in fragmented and uncoordinated courts, to manage such balance? It is often the case that both providers and insurers are concentrated, powerful, and earning supracompetitive profits (whatever “supracompetitive” means in a realm so thoroughly marbled with regulation, subsidy, and barriers to entry).

Insurers are competing in many markets—they’re just frequently doing so in ways that are socially unproductive. As I have noted before, there are effective competitive strategies for insurers that reduce social welfare overall. Given that the average insured stays in a plan for less than three years, the marketplace rewards insurers who put hurdles in front of expensive preventive care, or scramble to drop those with extensive medical needs. It also exacerbates the coverage crisis that necessitates health reform in the first place.

Genuine health reform will provide incentives for insurers to do things that actually improve individual and public health—programs such as transparent physician rating, preventive and chronic care programs, and intensive data analysis to promote evidence-based medicine. Like the V.A., a public option can be ordered to do such things. Moreover, it can be required to cover the costly or unprofitable individuals that private insurers won’t touch. The government might “require” private health insurers to do the same, but I would not count on overwhelmed regulators to enforce such laws adequately.

Sadly, even when competition is exposed as an empty vessel, our language of discussing health care tends to gravitate back to it as an ideal. Fortunately, Daniel Callahan’s recent essay on the “common good” as a justification for health reform provides a richer vocabulary of evaluation. Callahan has no illusions about transforming the current debate with a new language of moral evaluation, but his words are worth pondering:

I have not painted a hopeful picture about the common good in American health care. That simply does not seem possible. An abiding suspicion of government, a belief in the free market as an engine of prosperity (and thus, by an illogical leap, as an engine of good health care), and the majority’s fear that they may lose the benefits they already have—all this leaves little room for an embrace of the common good. Solidarity, the value behind European health-care systems, seems to me the best basis for universal care, better than justice or rights. But the sense of solidarity required for serious health-care reform cannot be wished into existence. . . .

Suffering, disease, and death are our common lot. They ought to be dealt with as our common problem. It is a shame that the kind of empathy and mutual support that Adam Smith understood to be a requirement of morality have not, in our culture, been extended to health care—extended to one another in the recognition that we all have bodies that go awry and fail. Instead we are offered a consumer model, a national Walmart of medical choice where we are all sharp-eyed purchasers getting the best possible deal for ourselves. A construal of the common good as the freedom of consumers to get what they want, indifferent to the fate of others, is a cheap substitute for the real thing.

Callahan is too pessimistic about the viability of an appeal he’s helped craft. As Catherine Arnst has argued, a moral case for health reform–as either compassion for others or self-interest properly understood–is essential in current debates. Even the most self-centered person can imagine losing a job, a spouse, or another source of insurance. It seems paradoxical to expect the very companies that deny such coverage to offer it under government fiat. A public option is a logical response to our market—and moral—failure to separate the experience of illness from anxiety over potential financial ruin. As the Health Care Experts Bureau at Campaign for America’s Future recognizes, a public option is the key to demonstrating that the same commitments to cost containment, universality, and basic fairness evident in Medicare can be brought to Americans not presently served by the private insurance industry.

X-Posted: HRW.

1) Increase productive competition in health care? Everyone talks about “increasing competition” among insurers and providers, but there are many ways to compete. Hospitals and doctors can game the reimbursement system. Insurers may not directly discriminate against the sick, but can find other ways to keep high-risk patients out of their plans, as even the most market-oriented health policy experts realize: [...]]]> House and Senate leaders will soon have to reconcile several different versions of health reform bills. The bills are complex, but some simple principles should guide the process of integrating them into a final product. As the press reports on a whirlwind of proposed laws, we need to ask of any particular proposal: Does it . . .

1) Increase productive competition in health care? Everyone talks about “increasing competition” among insurers and providers, but there are many ways to compete. Hospitals and doctors can game the reimbursement system. Insurers may not directly discriminate against the sick, but can find other ways to keep high-risk patients out of their plans, as even the most market-oriented health policy experts realize:

[T]o avoid patients with costly, complicated medical conditions, health plans could include in their networks relatively few doctors who specialize in treating those conditions, said Mark V. Pauly, professor of health-care management at the University of Pennsylvania’s Wharton School.

Both the Netherlands and Switzerland have already experienced problems in this area, even though the Netherlands has implemented risk-adjustment methods (which attempt to deter such “cherrypicking” and “lemondropping”) far more serious than anything proposed in current bills in the US. As Karen Pollitz has repeatedly argued, we’re going to need a much greater investment in insurance regulation to make any reform bill work.

2) Make it easier for uninsured or underinsured individuals to buy coverage? Many of the proposals for allocating and awarding subsidies for coverage sound exceedingly complex. We’re hearing about serious limitations on access to exchanges, subexchanges, burdensome “free rider” provisions, etc. Any particular provision may sound good in the abstract, but taken as a whole they could become an obstacle course that makes obtaining insurance coverage a miserable and exasperating experience for those supposedly aided by reform. During the second Bush administration, hundreds of thousands of children eligible for subsidized health insurance were not enrolled because states failed to make enrollment convenient enough for time- and cash-strapped parents. As Liebman and Zeckhauser remind us, “we must design systems for mere mortals, not the people who inhabit the models of traditional economists.” What seems easy to one of DC’s privileged elite can be very hard for an overworked mom or minimum wage-earning service worker.

I believe that the main reason a solid 2/3 to 3/4 of the country supports a public option is because it is a straightforward, transparent way to provide a backstop of health insurance for everyone. If Congress both rejects a public option and makes subsidies for private insurance as complex as the tax code, health reform risks becoming a model case of government failure. Last week’s negative votes on Rockefeller’s strong and Schumer’s weak public options could easily become a “you broke it, you bought it” moment for centrist Democrats and Republicans on the Senate Finance Committee.

3) Fairly distribute the burdens of reforming the health care system? This is the tax and finance question, and it promises to generate some epic battles on Capitol Hill. However the Senate Finance proposal ultimately evolves, it will be in tension with a House of Representatives that sees progressive taxation as a foundation for financing reform. The Baucus proposal to tax “high end”/Cadillac/”gold-plated” health plans may seem progressive, but it promises to gradually engulf even normal plans. While David Leonhardt offers some good economic arguments for such a tax, policymakers should be guided by Leonhardt’s observations on the propriety of taxing those at the very top of the income scale, who have disproportionately benefited from economic trends and tax cuts of the past decade.

4) Provide incentives for long-term cost-saving and preventive medicine? Comparative effectiveness research is a crucial tool for focusing pharmaceutical research on drugs that save lives. We have a shortage of primary care doctors vis a vis specialists. Reimbursement systems are too easy to game. Insurance markets are concentrated and need more competition and transparency. Any bill that ignores these problems (or fails to empower HHS or another agency to address them) can’t lead to truly sustainable universal coverage.

The health reform fight has been bruising, disappointing, and frustrating for many who care about health policy. Many unwise assumptions are already baked into leading bills. In the Senate, ostensibly Democratic lawmakers are promoting what are essentially Republican ideas and granting enormous subsidies to industries that may well betray them at the next electoral cycle. Nevertheless, there remain many opportunities for improving the final product at the beginning of the end of the legislative process.

X-Posted: HRW.

The Google Book Search settlement will be, if approved, the most significant book industry development in the modern era [emphasis added]. . . . The Authors Guild has about 8000 members. [...]]]> The Google Books litigation has inspired a lot of commentary on the web. As an early October fairness hearing approaches, a consensus appears to be building: the proposed settlement is too important and complex for a court to approve in its current form. Agent Lynn Chu has complained that “No one elected the[] ‘class representatives’ to represent America’s tens of thousands of authors and publishers to convey their digital rights to Google.” Pamela Samuelson, by all accounts one of the leading academics in American intellectual property law, has this to say:

The Google Book Search settlement will be, if approved, the most significant book industry development in the modern era [emphasis added]. . . . The Authors Guild has about 8000 members. OCLC has estimated that there are 22 million authors of books published in the U.S. since 1923 (the year before which books can be presumed to be in the public domain). Jan Constantine, a lawyer for the Authors Guild, is optimistic that authors and publishers of out-of-print books will sign up with the Registry, but there are many reasons to question this.

For one thing, the proposed settlement agreement implicitly estimates that only about 750,000 copyright owners will sign up with the Registry, at least in the near term. Second, many books are “orphans,” that is, books whose rights holders cannot be located by a reasonably diligent search. Third, many easily findable rights holders, particularly academic authors, would much rather make their works available on an open access basis than to sign up with the Registry. Fourth, signing up with the Registry will not be a simple matter, since the Registry won’t just take your word for it that you are the rights holder. You are going to have to prove your ownership claim.

The non-representativeness of the class is one ground on which it is possible to object to the proposed Book Search settlement. Other reasons to object or express concerns will be explored in subsequent articles. Objections must be filed with the court by September 4, 2009.

A suitable platform for hosting public discussions of the deal only launched a few weeks ago, thanks to the diligent efforts of James Grimmelmann (who is also organizing an academic conference on the issue in October). The proposed settlement raises a number of issues, which may only be addressed by extensive regulation of the project — or a public alternative dedicated to serving those marginalized by the current proposal.

The issues fall into at least four categories:

1) Antitrust: Randal Picker, Christopher Suarez, and James Grimmelmann have addressed the proposed settlement’s likely effects on competition in the field. On the surface, it appears that Google Books would be a good alternative to companies like Amazon and Elsevier, offering a new intermediary designed to drive down the cost of access to knowledge. However, academics have pointed out several specific terms of the proposed settlement that threaten to reduce competition in the field of digitized books in the long term.

2) Pricing: Here the basic worry is that Google Books could become like the big intermediaries criticized by the open access movement for excessive pricing of academic, scientific, and technical works. Universities have been burned in the past by nonchalantly accepting big publishers’ mergers and growing control over a corpus of academic journals. Though Google is supposed to bargain on behalf of book users to reduce prices charged by book owners, the record of private insurers in accomplishing the same “middleman” role is not heartening.

The proposed settlement envisions that Google will stand between consumers and producers of knowledge. It will play a role similar to that of private insurers in standing between providers and patients—determining what access people get, how much they have to pay, etc. The worrisome aspect of that arrangement is that providers and private insurers are both very concentrated in the US, and consumers (i.e., the businesses and individuals who buy insurance plans) are not. That’s a key reason why the US spends so much more on health care than other industrialized nations, without getting better results, access, or quality.

I’d expect to see the same dynamics play out in the context of books if this settlement goes through, because it promises to create parallel levels of concentration in the Registry (imagine all hospitals combined into one bargaining unit) and Google (similarly, imagine a merger of Cigna, United Health, and WellPoint). Bilateral monopolies aren’t pretty for those on the outside — think of ever-rising ticket prices for fans that result from the negotiations of the players’ union and baseball owners. That’s why I think a “public option” is as important in digitized books as it is in health care. And at the very least, ongoing antitrust supervision, like that provided for similar schemes in the past, should apply here.

3) Privacy: Here I can’t do better than EPIC, a leading group on these issues. Here are their concerns:

Civil liberties organizations are urging Internet users to tell Google to adopt privacy protections for the Google Book Search. A judge in New York will determine later this year whether to approve the proposed settlement that would establish the service and give Google access to detailed personal information without any privacy safeguards.

The chart at the bottom of that page shows how the settlement threatens the “right to read anonymously.”

4) Cultural Power: Authors are concerned about Google’s power over the distribution, visibility, and pricing of their work. The Registry’s proposed leadership is not sufficiently representative of the wide range of publishers and authors. Perhaps a) different types of books should be subject to different types of boards of leadership, and b) all decisions about distribution, visibility, and pricing be made in an open manner. As for 4a), I think academic author in particular should worry about their books being subject to the types of revenue strategies pursued by, say, romance novelists or self-help authors. We need a separate board to handle academic books, or at least university press books. As for 4b): Google will counter that it needs to be secretive here, as it is in so many other areas, because unsavory actors could game the system. But Google should at least concede that concerns about gaming are lower in the book space than in the search space, since search engine optimizers are unlikely to publish fake books to game the system. Also, there could be a relaxation of these terms of openness as long as there is some open alternative.

In conclusion: for me, the key problems law can address are

a) extraordinary pricing power by Google/Registry alliance,
b) lack of transparency about how terms will be set,
c) lack of a public alternative to serve the people that Google fails to serve, and
d) threats to privacy

How do we solve these problems? I would propose the following responses:

a) guarantee of some form of free or subsidized access for those making under 300% of federal poverty level wages,
b) either open all Registry proceedings or at least follow Danny Weitzner’s approach to “extreme factfinding” here,
c) condition the settlement on either i) Google’s giving a copy of the digitized corpus to the government in exchange for the cost of scanning and a reasonable rate of return and/or ii) the government requiring all works copyrighted after 2009 to be digitally deposited and part of a corpus that the government could operate and make available on its own terms, and
d) allow EPIC and others to negotiate with relevant FTC policymakers to build in privacy safeguards.

I know these terms are all likely to be controversial. A public option in particular should respect the autonomy and growth of private search in this field — the organization of knowledge is an exciting field for private sector innovation. But I hope one thing is clear: it would be unjust to allow the parties to settle the case without giving a wide range of stakeholders an opportunity to fully vent their concerns. And given the likely need to involve the FTC, DOJ, and Copyright Office in ongoing supervision of the settlement terms, it is time for some inter-branch cooperation and coordination on the issue.

Image Credit: *keng.

Bruce Vladeck: “The CBO’s track record in predicting the effects of health legislation is abysmal. Over the last two decades, the CBO has routinely overestimated the costs of expanded [...]]]> Back in 2007, wise wonks were already warning that the Congressional Budget Office could torpedo health reform. The CBO dealt Clintoncare a heavy blow by saddling it with huge cost projections — and failing to take into account the savings the program would realize for individual citizens and the private sector. Current CBO director Doug Elmendorf has been riding a wave of notoriety as an objective “referee” in an increasingly bitter reform battle. But as his office’s one-sided estimates enervate reform, it’s beginning to risk its reputation for impartiality. Consider the following observations about CBO’s work:

Bruce Vladeck: “The CBO’s track record in predicting the effects of health legislation is abysmal. Over the last two decades, the CBO has routinely overestimated the costs of expanded government health care benefits and underestimated the savings from program changes designed to reduce expenditures. Most recently, it overestimated the five-year cost of Medicare Part D — the prescription drug benefit — by more than 35%. Even more dramatically, the CBO’s estimates of the Medicare savings from the Balanced Budget Act of 1997 underestimated the impact, on average, by a full 100%. That’s right: In the BBA’s first three years, Medicare spending fell fully twice as fast as the CBO had projected.”

Timothy Stoltzfus Jost: “[A] moment’s reflection would lead one to realize that the CBO’s guess that [a reform proposal] would save [only] $2 billion is about as worthless as an estimate that a loaf of bread will cost $5.65 in 2019, or a gallon of gasoline $4.73. Indeed, the CBO admits as much, stating that it actually believed the proposal would save nothing, but “there is also a chance that substantial savings might be realized.” . . .[T]he media needs to stop reporting CBO reports as though they reflect the real costs of reform.”

Maggie Mahar: “When I read Elmendorf’s testimony suggesting that the [House] bill wouldn’t bend the trajectory of federal health spending, I couldn’t help but wonder: Did he understand how the proposals in the 1,018 page bill dove-tailed with the excellent recommendations that the Medicare Payment Advisory Commission (MedPac) has made in recent years? Has Elmendorf read the lengthy MedPac reports?”

When respected experts like Maggie Mahar are wondering if Elmendorf has understood key literature in the area, something’s gone wrong at CBO. The media’s uncritical acceptance of his figures can only last as long as it fails to report the true complexity and uncertainty involved in both substantive reform and the do-nothing option that CBO’s handiwork is unintentionally advancing.

Of course, anyone familiar with Timothy Westmoreland’s work on CBO budget scoring would have been suspicious of its prognostications from the outset. As he noted in 2008:

The budget process systemically favors policies that let sick people die rather than incur future government-financed health costs [arising out of survivors' increased life expectancy]. Second, the process also structurally favors policies that keep expenses off the federal books by working through mandates rather than spending. Both of these problems should be addressed before the Congress considers universal coverage legislation.

The latter bias, toward mandates, systematically “fails to recognize financial benefits to non-government actors” that are realized via alternative routes to universal coverage. Even if a public health option saved citizens tens or hundreds of billions of dollars by competing with private insurers and driving down premiums, CBO couldn’t factor such a boon to our economy into its solipsistic calculations. (And don’t even think of asking it to quantitatively value the peace of mind and labor mobility such an option would generate.)

Despite all these shortcomings of the CBO numbers (and many forms of cost-benefit analysis generally), cost estimates will loom ever-larger in health care debates. As T.M. Porter’s book “Trust in Numbers” observes,

[Q]uantification grows from attempts to develop a strategy of impersonality in response to pressures from outside. Objectivity derives its impetus from cultural contexts, quantification becoming most important where elites are weak, where private negotiation is suspect, and where trust is in short supply.

Neverthless, Vladeck is right to argue that “instead of treating CBO estimates like the Ten Commandments, we should treat them like the informed wild guesses they actually are.” If CBO fails to advance such disclaimers itself, it risks ending up as discredited as the bailout wizards of Wall Street. CBO’s clinically depressive pessimism about health reform costs looks about as trustworthy as the manic assumptions of ever-rising home prices that fueled the banks’ bogus boom.

There are also legitimate worries about Elmendorf’s own possible political biases. Martin Feldstein, the director of the Council of Economic Advisers (CEA) under President Ronald Reagan, mentored him. Guess who came out today with a remarkably disingenuous opinion piece that simultaneously laments rising health costs and runs down the cost effectiveness research and government bargaining power necessary to rein them in? Even more astonishingly, Feldstein states that “there is already a very competitive private insurance market” — despite David Balto’s well-corroborated testimony that “few markets are as concentrated, opaque and complex” as private health insurance. If Elmendorf is still consulting with Feldstein on health matters, we have a lot to worry about — especially if he’s serious about cutting survivors’ costs.

Photo Credit: LongView, Fortune Teller.

Hudson County, where many of the arrests in New Jersey were made, has a small town feel and mentality. Everybody knows everybody. Lots of people are related to each other. It’s an isolated place, in many ways, so that the politicians who live there really don’t feel connected to the larger world. They feel they operate in a [...]]]> My colleague Paula Franzese has been criticizing New Jersey’s culture of political corruption for some time. Last week’s FBI sweep came as no surprise to those who’d been following her work to reform the system. For about four years I lived in the epicenter of the current scandal, Hudson County, and I thought this blog post from Helene Stapinski captured the political atmosphere there well:

Hudson County, where many of the arrests in New Jersey were made, has a small town feel and mentality. Everybody knows everybody. Lots of people are related to each other. It’s an isolated place, in many ways, so that the politicians who live there really don’t feel connected to the larger world. They feel they operate in a sort of vacuum, where no one will really notice what they do.

But because of Hudson County’s proximity to New York, it’s always been a hot spot, first for industry and now for development, so the potential for making the big bucks exists. There’s the money, without the sophistication. In places like New York City, bribes are made every day as well, but people know how to cover their tracks. Couple the small town ignorance and arrogance of “I can do what I want. Nobody’s watching” with the big town cash possibilities, and you have one of the most politically corrupt places on earth. Welcome to Hudson County.

What really shocked me when I lived there was the way in which these values (or lack thereof) filtered into even the trivial corners of political or social life. At a condo association near where I lived, the books weren’t routinely available. To inspect them, you had to make an appointment, during very restricted hours, and you could only bring a pencil and paper–no electronics such as cameras or laptops. One valiant owner who tried to force release of all the books was hounded and humiliated by the association management, which plastered the building with notices that she was “driving up maintenance” by forcing them to hire a lawyer to fend against her demands.

Elections in Journal Square, Jersey City, were also an adventure. Several local panjandrums attired in suits and sashes were “challengers,” ready to pounce on any confused or ill-credentialed voter who didn’t appear sympathetic to their candidate. (I have no idea how they made these determinations–maybe they had studied peremptory challenges.) In an area where public services where often marginal, shuttles reliably trucked in voters who lacked transportation for at least that day.

I ultimately moved away from Journal Square because, despite early hopes for the area, after a few years there, I could not envision it getting its act together in my lifetime. It’s likely to remain what it is now: a way-station for hard-working immigrants eager to earn their way out of it.

Picture Credit: Wikipedia entry for Frank “I am the law” Hague, Mayor of Jersey City from 1917-1947. He became famous in First Amendment jurisprudence for his efforts to silence labor unions. According to Time Magazine, “He was the last of the great machine bosses and the most absolute of them all. On a salary that never exceeded $8,500 a year during his eight terms as mayor of Jersey City, he came to reckon his personal fortune at more than $2,000,000, his homes at four (in Jersey City, on Manhattan’s Park Avenue, on Miami’s Biscayne Bay and on the Jersey coast at Deal).”

Journalist Nick Reding . . . spent nearly four years charting meth’s course in Oelwein, Iowa . . . There, the people who grow our food are agribusiness oligarchs, and the people who run our factories have cut their workers’ wages by two-thirds, dissolved the unions and shipped in illegals to work for a paycheck that would barely pay for dog food.

Meth is a symptom of this collapse, not a cause. . . . [...]]]> I recently listened to a chilling podcast on a book about methamphetamine use in a small town of 6,000 in Iowa. The town of Oelwein had lost over 2000 jobs since the early 1980s. Timothy Egan’s editorial gives an excellent account of the economic backdrop for rural meth abuse:

Journalist Nick Reding . . . spent nearly four years charting meth’s course in Oelwein, Iowa . . . There, the people who grow our food are agribusiness oligarchs, and the people who run our factories have cut their workers’ wages by two-thirds, dissolved the unions and shipped in illegals to work for a paycheck that would barely pay for dog food.

Meth is a symptom of this collapse, not a cause. . . . Reding says it is “the only example of a widely consumed illegal narcotic that might be called vocational, as opposed to recreational.” . . . [I]t’s a preferred stimulant for people working two jobs in low-wage purgatory.

Many have called for cognition-enhancing drugs to increase productivity in high status professions. We hear less about drug use to make low-wage, low-autonomy work bearable. But it’s surely something we’ll see more market demand for, as movies like Sleep Dealer suggest. According to Reding, the pharma industry also pushed hard against DEA proposals that would have made it harder to make meth.

Correlating the failure of US industrial policy with the need for increased policing due to meth abuse also helps vindicate Bernard Harcourt’s theory of “neoliberal penality,” as expressed by a blogger here:

The idea behind neoliberal penality is that as the norm against government intervention in the economy has increased, governmental energies have been channeled instead to an ever-increasing carceral sphere. Neoliberalism argues that the market is naturally ordered, and that government intrusion constitutes a distortion that generally should be avoided. By contrast, the penal arena is seen as an appropriate venue for government to flex its muscles. Consequently, the social forces which might press against increased penality are weakened, as crime and punishment are precisely the areas in which government is seen as having the greatest claim to authoritative legitimacy.

When work disappears, many of the natural impediments to addictions go with it. We should not be surprised if failure to invest in jobs programs leads to ever more spending on prisons, surveillance, and rehab. Thankfully, books like Reding’s are helping us “connect the dots among America’s agribusinesses, drug companies and global trade and problems like unhealthy diets, the destruction of small farms and farming communities.”

Image Credit: skittlbrau, Don’t Meth Around (street art).

The president has so far nominated five judges to federal circuit courts. On average, these nominees are 55 years old, more than a decade older than Sotomayor was when she was nominated to the Second Circuit. (She was 43.) For years, Republicans have been nominating sharp young conservatives to the lower federal courts. Now, rather than looking for young legal talent of its own, a Democratic administration seems to be favoring older nominees. In our view, this is a major mistake.

I think Fontana and Schwartzman are right that older appointees are a mistake for the Democratic party, even though they are probably better for [...]]]> David Fontana and Micah Schwartzman complain in TNR that President Obama has failed to appoint young judges to federal appeals courts:

The president has so far nominated five judges to federal circuit courts. On average, these nominees are 55 years old, more than a decade older than Sotomayor was when she was nominated to the Second Circuit. (She was 43.) For years, Republicans have been nominating sharp young conservatives to the lower federal courts. Now, rather than looking for young legal talent of its own, a Democratic administration seems to be favoring older nominees. In our view, this is a major mistake.

I think Fontana and Schwartzman are right that older appointees are a mistake for the Democratic party, even though they are probably better for the nation as a whole. (I favor more seasoned judges, particularly as life spans lengthen.)

This is one of many examples where Democrats are trapped in a difficult dilemma by Bush administration practices. If they appoint older judges, they let the circuit courts’ current rightward skew persist longer. But if they retaliate with relative youngsters, we lose the experience and insight that only age can bring to the courts. Same goes for executive appointments: many transparently political appointees of the Bush era have “burrowed in” to permanent positions at agencies, and balance probably requires similar strategies close to the end of the Obama administration — even if long-serving bureaucrats could do a better job in such positions.

Similar dynamics affect government transparency policies. For example, the Brennan Center recently “gave the Obama administration an F for its use of State Secrets” and has criticized it for continuing several Bush era policies of opacity. Here, again, a change would probably be for the better — but we all know that if a terrorist attack occurred, Dick Cheney’s acolytes would be on TV the next day declaring that Obama’s openness helped cause the carnage.

The health reform debate provides a final example. Bush’s plan for Medicare Part D was essentially an unfunded benefit. Rather than take on the tough task of real cost containment, he and the Republican Congress delegated it to fragmented private insurers with little power to make it happen. Conservatives now complain about a dodgy cost curve in Obama’s plans, but denounce virtually every proposed effort for cost containment as “socialized medicine.” Obama’s political fortunes probably rise if he follows the Bush path, but the country will be better off if he and Congress embrace fiscal responsibility.

In light of these examples, I think Fontana and Schwartzman have shed light on a larger phenomenon of the dangers of unilateral disarmament in an increasingly partisan age. If rules of cooperation like the filibuster exist at any less a status than constitutional norm, perhaps the Dems should think deeply about the proper deployment of the “constitutional option” pioneered by those on the other side of the aisle.

[G]lobally interconnected and integrated financial networks just may be too complex to prevent crises like the current one from reoccurring. . . . A 2006 report co-sponsored by the Federal Reserve Bank of New York and the National Academy of Sciences concluded that even defining systemic risk was beyond the scope of any existing economic theory. Actually managing such a thing would be harder still, if only because the number of contingencies that a systemic risk model must anticipate grows exponentially with the connectivity [...]]]> The “optimal size and complexity of developing countries’ financial systems” has been hotly debated in the economics community. Writing for the Harvard Business Review & Boston Globe, Duncan Watts focuses on our own dilemmas in a provocative account of complex systems:

[G]lobally interconnected and integrated financial networks just may be too complex to prevent crises like the current one from reoccurring. . . . A 2006 report co-sponsored by the Federal Reserve Bank of New York and the National Academy of Sciences concluded that even defining systemic risk was beyond the scope of any existing economic theory. Actually managing such a thing would be harder still, if only because the number of contingencies that a systemic risk model must anticipate grows exponentially with the connectivity of the system.

So if the complexity of our financial systems exceeds that of even the most sophisticated risk models, how can government regulators hope to manage the problem? There is no simple solution, but one approach is close to what the government already does when it decides that some institutions are “too big to fail,” and therefore must be saved – a strategy that, as we have seen recently, can cost hundreds of billions of taxpayer dollars. . . .

An alternate approach is to deal with the problem before crises emerge. On a routine basis, regulators could review the largest and most connected firms in each industry, and ask themselves essentially the same question that crisis situations already force them to answer: “Would the sudden failure of this company generate intolerable knock-on effects for the wider economy?” If the answer is “yes,” the firm could be required to downsize, or shed business lines in an orderly manner until regulators are satisfied that it no longer poses a serious systemic risk. Correspondingly, proposed mergers and acquisitions could be reviewed for their potential to create an entity that could not then be permitted to fail.

Of course, our system has been headed in precisely the opposite direction, largely thanks to the “best and brightest” now at Treasury and the Fed. As Simon Johnson puts it, we “pay too much deference to the expertise and presumed wisdom of a sector that screwed up massively.”

On the Media has a great [...]]]> First Amendment fundamentalist Floyd Abrams is back on the attack, now in the service of the credit rating agency S&P. He says that their ratings are essentially the same as an editorial — a position I looked at with some skepticism here. Editorials fail to receive the regulatory subsidy routinely channeled to raters, via acts like the Secondary Mortgage Market Enhancement Act of 1984 and the Investment Company Act of 1940, and agencies like the National Credit Union Administration (all of which mandate the use of raters’ products). Abrams appears to want to let the raters get all the benefits of such government subvention, without the liability or extensive regulation it should naturally lead to.

On the Media has a great interview with Abrams, who vigorously defends the agencies’ actions:

[Interviewer] BROOKE GLADSTONE: Okay, so first of all, explain to me why this is more like an editorial. To me it seems more like a clothing inspector, the people who leave the little number inside the clothing you buy. They leave their number so that if the zipper was put in backwards, for instance, they could theoretically take responsibility. Why are the ratings companies different from that?

FLOYD ABRAMS: Well, because the rating agencies use their models, use their heads, use their common sense, have ratings committees. They sit down and they come out with their best judgment as to what is likely to happen in the future about repayment of debt. And that is not subject to mathematical yes/no answers. It’s not the same as saying, my zipper is no good or a couch is no good. It’s not being an inspector. It’s not.

BROOKE GLADSTONE: Fair enough. Let’s move away from that analogy and let’s go to one that attorney David Grais, who we just spoke to, came up with, that in many cases rating agencies want their ratings to be protected as opinion, like, say, a restaurant critic’s. But more often, he notes, they’re like critics who go into the kitchen, make the food and then come out and write about it. They help create these deals. And they have a financial stake in their own ratings ‘cause they’re paid by the very companies they rate, a seemingly obvious conflict of interest.

FLOYD ABRAMS: Rating agencies have analytic standards. They apply those standards. And, yes, they discuss with the entities that they’re rating why they’re doing what they’re doing. And if the entity asks them, well, you know, how come you’re giving us a triple BBB instead of a double AA, they tell them why. And if the entity wants to do things to get a higher rating, they can do them.

And it is not inappropriate, in my view, so long as they take good steps to deal with the potential for conflict of interest. It is not inappropriate that they get paid by the entities they rate. I mean, it is not conceptually that distinguishable from, you know, a large entity which puts big ads in – what, a motorcycle magazine and then they write about the motorcycles. Do they have to be careful? Yeah.

BROOKE GLADSTONE: The fact of the matter here is that the ratings agencies, in this case, were so widely off the mark, ultimately, that it doesn’t seem to have been just a series of mistakes of judgment.

I really look forward to seeing how Abrams would deal with facts like these if similar revelations emerge about his own client:

[In the package of loans it was to rate,] Moody’s learned that [over 38 percent of the borrowers] did not provide written verification of their incomes. . . . On the plus side, Moody’s noted, 94 percent of those borrowers with adjustable-rate loans said their mortgages were for primary residences. “That was a comfort feeling,” [one analyst] said. Historically, people have been slow to abandon their primary homes. When you get into a crunch, she added, “You’ll give up your ski chalet first.”

Borrowers have no chance of repaying via income and assets? Assume a ski chalet! (Much like the classic economic approach of assuming a can opener.) As the Summary Report of Issues Identified in the Commission Staff’s Examinations of Select Credit Rating Agencies (by the Office of Compliance Inspections and Examinations of the SEC) noted in July 2008, none of the rating agencies had specific procedures for collateralized debt obligations–even though 17 CFR 240.17g-2 required them to make certain internal documents public, including procedures and methodologies they use to determine credit ratings.

Sadly, I think that, given the current state of the law, Abrams’s First Amendment arguments will do well in front of many courts. But as David Segal states in the NYT article, “The First Amendment is no defense against fraud, and that is what is alleged by many of the plaintiffs.” Segal notes that, “Against them, Mr. Abrams will argue that S.& P. was every bit as blindsided as nearly everyone else in the private sector and in the regulatory sphere.”

Here are a few quotes that appear to be from S&P:

1. Internal Email: “rating agencies continue to create [an] even bigger monster – the CDO [collateralized debt obligation] market. Let’s hope we are all wealthy and retired by the time this house of cards falters.”

2. Instant Message: “It could be structured by cows and we would rate it.”

These people don’t sound blindsided to me. Rather, they, like the three ratings agency CEOs who together earned $80 million themselves over the past 6 years, sound like people who knew exactly what they were doing: getting while the getting was good. If Abrams succeeds, he’ll be making that particular Wall Street strategy all the more foundational for America’s brave financial innovators.

But would a loss for S&P change anything? I really don’t know. What I do believe is that the US discourse on rating agencies would probably benefit from some input by scholars like John Quiggin, who argue that “Among the many challenges in reconstructing a sustainable system of global finance, the replacement of ratings issued by for-profit agencies with an alternative system, in which AAA ratings actually mean something, is among the most important.” Quiggin notes that the rating agencies are biased in many important ways:

[T]hey have a long-standing ideological bias against the public sector. This is reflected in the fact that state and local governments, which rarely default on their debt, are assessed far more stringently than corporate issuers. In the last year, thousands of private-sector securities issued with AAA ratings have been downgraded to junk, and many have subsequently gone into default.

By contrast, defaults on government debt have remained rare. One effect of the differential ratings practices of the agencies is that government borrowers have been forced to seek insurance from bond insurance companies such as AMBAC that are, in reality, less sound than the governments they are insuring.

Unfortunately, the 2006 Credit Rating Agency Reform Act specifically prohibited the SEC from regulating the “substance of the credit rating or the procedures and methodologies” used to calculate it. Reform measures proposed by the Obama administration have barely addressed the CRA’s. At the very least the government ought to be able to use FAIR v. Rumsfeld to insist on more responsible behavior (as Jennifer Chandler has argued, in another context, here). CRA’s should take the bitterness of regulation with the sweetness of regulatory subsidies.

I believe that as long as the US government provides a de facto regulatory subsidy to CRA’s, it should require them to factor into at least some of their ratings the full social value of the rated entity—not simply its likelihood to default. Ratings are often a self-fulfilling prophecy, and the state should harness their value to promote projects that improve the health, safety, security, and well-being of citizens. At the very least, the government should set up a “public option” in credit rating (akin to the proposed public option in health insurance) that is more transparent and accountable than extant credit raters. If the finance sector is going to grow as dependent on government help as the health care sector has, it should learn to accept the same web of standards and regulation that guarantee some minimal accountability for providers who accept government funds. Looking at the AHRQ and comparative effectiveness research could be a good place to start.

Beneath all the sturm und drang about soaking the rich, the press should focus on three underlying realities. First, income and wealth vastly increased at the top of [...]]]> The usual suspects are alarmed by the House Health Reform Bill’s proposed surcharge on high income earners. As the NYT explains with some examples, “Starting in 2011, a family making $500,000 would have to pay $1,500 in additional income tax to help subsidize coverage for the uninsured. A family making $1 million would have to pay $9,000.” The surcharge rises with income, and over time, to hit 5.4% (by 2013) for households earning over $1 million annually. Households making between $280,000 and $500,000 per year would only face a 2% surcharge by 2013.

Beneath all the sturm und drang about soaking the rich, the press should focus on three underlying realities. First, income and wealth vastly increased at the top of the distribution over the past thirty years — in part because of corporate cost savings that included denial of health coverage to millions of workers. Second, inequality itself exacerbates the health care crisis, by fueling the allocation of medical care according to profit potential, not need. Third, inequality causes health problems, because societies grow “more dysfunctional, violent, sick and sad if the gap between social classes grows too wide.” The surcharge on the rich is not some random resentment inflicted by Frenchified Madame DeFarges on America’s John Galts. The surcharge will itself help address some of the problems health reform is designed to solve. I’ll unpack these thoughts in a series of posts this week.

Nevertheless, the surcharge is not progressive enough, and this should be the main message of liberals commenting on the House bill.

As David Leonhardt has observed in another context,

Today . . . the very well off and the superwealthy are lumped together [in the tax code]. The top bracket last year started at $357,700. Any income above that — whether it was the 400,000th dollar earned by a surgeon or the 40 millionth earned by a Wall Street titan — was taxed the same, at 35 percent. This change [from the past] is especially striking, because there is so much more income at the top of the distribution now than there was in the past.

The House’s top bracket for the surcharge is one million dollars, a slight improvement. But it is very hard for me to see why those who make that amount should be treated the same as those in the “Fortunate 400″–the 400 highest earning households which made, on average, more than $263 million apiece in 2006. As a Wall Street Journal article reports, “the group’s average income tax rate — calculated as income taxes paid as a percentage of adjusted gross income — fell to 17.2%. in 2006 from 18.2% the prior year. That’s down from a high of 29.9% in 1995.” The health care surcharge makes up less than half of that decline in taxes from 1995 to 2006.

In short, the next time a pundit screams “socialism” at a surcharge like the one proposed by the House, I’d recommend calmly agreeing, and pointing out that those at the very top of the income scale do indeed appear to be shirking their fair share of the fiscal burden. I’d also ask the pundit to take a look at these figures from Charles Morris’s The Trillion Dollar Meltdown:

Between 1980 and 2005, the top tenth of the population’s share of all taxable income went from 34 percent to 46 percent, an increase of about a third. The changing distribution within the top 10 percent, however, is what’s truly remarkable. The unlucky folks in the 90th to the 95th percentiles actually lost a little ground, while those in the 95th to 99th gained a little.

Overall, however, income shares in the 90th to 99th percentile population were basically flat (24 percent in 1980 and 26 percent in 2005). Almost all the top one-tenth’s share gains, in other words, went to the top 1 percent, or the top “centile,” who doubled their share of national cash income from 9 percent to 19 percent.

Even within the top centile, however, the distribution of gains was radically skewed. Nearly 60 percent of it went to the top tenth of 1 percent of the population, and more than a fourth of it to the top one-hundredth of 1 percent of the population. Overall, the top tenth of 1 percent more than tripled their share of cash income to about 9 percent, while the top one-hundredth of 1 percent, or fewer than 15,000 taxpayers, quadrupled their share to 3.6 percent of all taxable income. Among those 15,000, the average tax return reported $26 million of income in 2005, while the take for the entire group was $384 billion.

A truly progressive health surcharge would take that fractal inequality into account. But we may as well support the small step towards fairness that the House Bill represents.

PS: Conor Clarke has a good series on the surcharge here.

X-Posted: Health Reform Watch.

Mike Allen at Politico.com [has] reported that Post publisher Katharine Weymouth has decided to solicit payoffs of between $25,000 and $250,000 from Washington lobbyists, in return for one or more private dinners in her home, where lucky diners will receive a chance for “your organization’s CEO” to interact with “Health-care reporting and editorial staff members of The Washington Post” and “key Obama administration and congressional leaders. . . .”

Though the Post’s leadership quickly backed away from the plan, we can [...]]]> As newspapers falter, we often hear about how terrible it would be if public funding supported them. Imagine the conflicts of interest! Well, we’re now getting an inside look at the “stealth marketing” media may need to engage in in order to survive:

Mike Allen at Politico.com [has] reported that Post publisher Katharine Weymouth has decided to solicit payoffs of between $25,000 and $250,000 from Washington lobbyists, in return for one or more private dinners in her home, where lucky diners will receive a chance for “your organization’s CEO” to interact with “Health-care reporting and editorial staff members of The Washington Post” and “key Obama administration and congressional leaders. . . .”

Though the Post’s leadership quickly backed away from the plan, we can only imagine what kinds of fire sales a few more years of economic hardship will bring:

Looks like Dan Froomkin got out just in time!

D IS FOR DIGITIZE: A Conference on the Google Book Search Lawsuit

New York Law School, Thursday, October 8 through Saturday, October 10, 2009

Everything about the Google Book Search project is larger than life, from [...]]]> Writing in Slate, Mark Gimein knocks down a number of straw man arguments against the Google Book search deal. I look forward to seeing how he grapples with more serious concerns, like those raised by James Grimmelmann. I’ve also been impressed by Christopher Suarez’s working paper on the need for antitrust scrutiny of the proposed deal . Suarez proposes a number of sensible settlement modifications that I hope the court will take seriously. It doesn’t have much time to get this right, as the following conference announcement shows:

D IS FOR DIGITIZE: A Conference on the Google Book Search Lawsuit

New York Law School, Thursday, October 8 through Saturday, October 10, 2009

Everything about the Google Book Search project is larger than life, from Google’s audacious plan to digitize every book ever published to the gigantic class action settlement now awaiting court approval. D is for Digitize will give this complex lawsuit the sustained attention it deserves. An interdisciplinary lineup of academics and practitioners will examine the settlement through the lenses of copyright, civil procedure, antitrust, the publishing industry, information policy, and literary culture. The conference is timed to coincide with the rescheduled fairness hearing in the Google Book Search case, which will be held on Wednesday, October 7 in New York City, just five blocks from New York Law School.

I look forward to seeing those interested in the future of access to knowledge at the conference, which I plan to attend.

Both narratives are told from the first-person point of view of a sarcastic, often uncouth protagonist who relies heavily on slang, euphemisms and colloquialisms, makes constant digression and asides, refers to readers in the second person, constantly assures the reader that he is being honest and that he is giving them the truth

Michael Madison has rounded up legal perspectives. It sets up an interesting tension between the opinions in Stallone v. Anderson and the Wind Done Gone case. [...]]]> A judge in New York today ruled that Fredrik Colting cannot publish his book, 60 Years Later: Coming Through the Rye, in the US, in part because it “contains a 76-year-old version of Holden Caulfield, the protagonist of ‘The Catcher in the Rye.’” The judge noted:

Both narratives are told from the first-person point of view of a sarcastic, often uncouth protagonist who relies heavily on slang, euphemisms and colloquialisms, makes constant digression and asides, refers to readers in the second person, constantly assures the reader that he is being honest and that he is giving them the truth

Michael Madison has rounded up legal perspectives. It sets up an interesting tension between the opinions in Stallone v. Anderson and the Wind Done Gone case.

Salinger has alienated many potential fans with the lawsuit. Apparently his young protagonist is also not exactly a darling of the youth set anymore:

Teachers say young readers just don’t like Holden as much as they used to. What once seemed like courageous truth-telling now strikes many of them as “weird,” “whiny” and “immature.” . . . Barbara Feinberg, an expert on children’s literature who has observed numerous class discussions of “Catcher,” pointed to a story about a Holden-loving loser in the Onion headlined “Search for Self Called Off After 38 Years.”

“Holden is somewhat a victim of the current trend in applying ever more mechanistic approaches to understanding human behavior,” Ms. Feinberg wrote in an e-mail message. “Compared to the early 1950s, there is not as much room for the adolescent search, for intuition, for empathy, for the mystery of the unconscious and the deliverance made possible through talking to another person.” Ms. Feinberg recalled one 15-year-old boy from Long Island who told her: “Oh, we all hated Holden in my class. We just wanted to tell him, ‘Shut up and take your Prozac.’ ”

And don’t forget the Adderall and Ritalin! Seriously, though, Mr. Salinger might want to take a chill pill and let others imagine futures for the characters he’s created.

Economists have known for 45 years — ever since Kenneth Arrow’s seminal paper — that the standard competitive market model just doesn’t work for health care: adverse selection and moral hazard are so central to the enterprise that nobody, nobody expects free-market principles to be enough. To act all wide-eyed and innocent about these problems at this late date is either [...]]]> I’ve addressed the “ostrich economics” of Gregory Mankiw on this blog before. Mankiw’s “Pitfalls of a Public Option” is yet another contribution to the genre. Mankiw argues that no public option in insurance is necessary, since “We don’t need government-run grocery stores or government-run gas stations to ensure that Americans can buy food and fuel at reasonable prices.” Paul Krugman’s response:

Economists have known for 45 years — ever since Kenneth Arrow’s seminal paper — that the standard competitive market model just doesn’t work for health care: adverse selection and moral hazard are so central to the enterprise that nobody, nobody expects free-market principles to be enough. To act all wide-eyed and innocent about these problems at this late date is either remarkably ignorant or simply disingenuous.

Krugman actually understates just how unconventional the economics of health care can be. Given these divergences from standard market models, Brad Delong may well be right to say that even Friedrich Hayek could approve the idea of a public plan: it’s a way “to use the market as an institutional discovery mechanism.”

Of course, most modern-day Hayekists are more likely to take Mankiw’s view than Delong’s; namely, that “private insurers, lightly regulated to ensure that the market works well, would offer Americans the best health care at the best prices.” We have a sense of how concentrated the private insurance industry and providers are. What exactly does “light regulation” look like in that context?

One clue can be found in Reed Abelson’s excellent article in today’s NYT, Insured, but Bankrupted by Health Crises. The story of the Yurdins conveys just how risky such a market can be:

[M]any . . . people . . . have coverage so meager that a medical crisis means financial calamity. One of them is Lawrence Yurdin, a 64-year-old computer security specialist. Although the brochure on his Aetna policy seemed to indicate it covered up to $150,000 a year in hospital care, the fine print excluded nearly all of the treatment he received at an Austin, Tex., hospital. . . .

At St. David’s Medical Center in Austin, where he went for two separate heart procedures last year, the hospital’s admitting office looked at Mr. Yurdin’s coverage and talked to Aetna. St. David’s estimated that his share of the payments would be only a few thousand dollars per procedure.

He and the hospital say they were surprised to eventually learn that the $150,000 hospital coverage in the Aetna policy was mainly for room and board. Coverage was capped at $10,000 for “other hospital services,” which turned out to include nearly all routine hospital care — the expenses incurred in the operating room, for example, and the cost of any medication he received.

In other words, even the hospital couldn’t understand (or anticipate) the tactics of Aetna. I wonder if Mankiw disapproves of Aetna’s approach here–or if he’d like to see Gotcha Capitalism further extended into the health industry.

Before ditching the public plan option, politicians should think hard about what the world of health care will look like without it. Jon Cohn provides a projection:

Fast forward a few years to the first day that [a weak] reform bill–signed with much fanfare in the Rose Garden, with a beaming bipartisan coterie–takes effect. The bill’s crown jewel is not the public option, but a “national insurance exchange,” a benefit clearinghouse that is supposed to sign up private insurers to provide choices to people without workplace insurance. These choices vary based on the region you live in, to reflect the plans in the local market.

In many markets, however, the choices turn out to be roughly as limited as they are today, when the dominant insurer enrolls at least half of privately insured people in 16 states and at least a third in 38 states. The national insurance exchange is meant to create greater competition, but for most of the country, the choice is basically between WellPoint and UnitedHealth–gargantuan for-profit insurers each about the size of Medicare. Yes, there is more than one choice in most areas, but not choices that meaningfully differ from each other, or from what is on offer today. . . .

Not surprisingly, the premiums that most plans offer within the exchange are just as high as they are today. Without a public plan offering coverage that, estimates project, would be around 25 percent cheaper, the private plans in many markets are free to gouge consumers without much concern about losing business. And without pressure on these plans to control costs, they aren’t about to cut back their administrative waste or high profits or excessive executive salaries, much less bargain aggressively with drug companies and hospitals demanding ever higher prices.

Not a pretty picture.

For an accessible opening example, consider Charles Morris’s description of the “bargaining” between doctors and insurers in his book “The Surgeons.” From a chapter entitled Money, here is a fascinating and counterintuitive [...]]]> In a response to one of my posts on the public plan, Tyler Cowen noted that it was “hard to translate” my points into “econspeak.” I agree, and I think that’s one reason why we need to pay attention to “alternative economics of health care,” to use the title of Geoffrey M. Hodgson’s excellent article. In a series of posts over the next few days, I will focus on the many ways in which classical economic reasoning fails in the health care context, and what that means for law.

For an accessible opening example, consider Charles Morris’s description of the “bargaining” between doctors and insurers in his book “The Surgeons.” From a chapter entitled Money, here is a fascinating and counterintuitive insight on the interplay between incentives and medical care:

There is a strongly held opinion, particularly among conservative think tanks, that with multiple competitive private payers, the normal interactions between vendors and payers will gradually create a more efficient health care system. I saw no evidence to support that belief.

What actually happens [at the hospital division he observed was that] the billing staff sit down each year; lay out the various payment plans on a spreadsheet, and decide on the division strategy–which surgeons will join which plans, and which carriers will be carried on a nonplan basis, trading higher payments for greater collection risk. Once that strategy is set, it is managed entirely by the collections staff. The surgeons simply join the plans they’re assigned to.

It is an interesting collision, I think, between two quite rational, but alien, thought systems. Classical market economists tend to define rationality as maximizing economic outcomes. The division’s equally rational strategy is to neutralize the plethora of payment incentives so the surgeons can practice their craft according to their lights, with minimum economic penalty.

This is a contest that the surgeons will almost always win. Health care pricing doesn’t work like a grain auction. The terms of insurance company health plans are set bureaucratically and changed only infrequently with very little feedback on actual vendor behavior. And the plans are so complex, and the course of a difficult case so unpredictable, that it is often impossible to know in advance what a final price will be. For all those reasons, game theory would suggest that the surgeons’ “neutralization” strategy is the sensible choice.

It is not that classical economics has no relevance to big-ticket health care–the proliferation of specialty hospitals suggests otherwise. But it is not the dominant paradigm within the Columbia-Presbyterian cardiothoracic division, or even a particularly important one. In other words, attempting to re-envision big-ticket medicine as a conventional problem in microeconomics may be what Alfred Whitehead called a “category error.”

Anyone familiar with the “health claims arms race” shouldn’t be surprised by this. But it is still refreshing to see it so clearly and compellingly explained.

Hodgson explains in some detail why these “slippages” between economic theory and practice occur. Here’s a precis of his approach:

Leading mainstream health economists suggest that health care has special features that make it different from other domains of application, posing restrictions on the appropriateness of some neoclassical assumptions. . . . [T]he literature points to the presence in health care of externalities, information asymmetries, uncertainty, supplier-induced demand, and derived demand. But while all these features are important, they are neither universal in health care systems nor unique to them.

I try to identify the peculiarities of health care systems by building on the neglected but vital concept of need. By contrast, mainstream economics starts from the subjective satisfaction or utility of the individual. Modern mainstream economics rejects or ignores the concept of need, but many leading economists from Adam Smith to Alfred Marshall have acknowledged objective needs as well as subjective satisfactions.

Does recognition of need for care obliterate the role of markets? No, but it does help us see why so much nonsense is being spouted in the current debate. And it leads us to shift from the classical economic problem of market design to the broader social science project of proper institutional design:

While shifting the analysis from a utility-based to a needs-based approach, it is not naively assumed that health authorities or professionals always know best. Indeed, the problem is one of institutional design where knowledge is developed and distributed, and where mistakes become useful cues for learning and adaptation.

The better we understand the counterintuitive economics of health care, the more we are able to see the need for a “public option” to shake up the entrenched dynamics of a broken health care marketplace. As Michael Grunwald notes, “If Medicare takes the lead in reform, private insurers should follow.”

PS: For the best recent cases made for the public plan, see these articles by Nate Silver, John Jacobi, Nicholas Kristof, Robert Reich, and the NYT Editorial Board.)

Hat Tip: Andrew Sullivan and Daniel Goldberg.

On April 16, 2009, the Thurston County Court ruled in favor of a Vietnamese man who sued for defamation. This case was the first of its kind in the state of Washington. . . . The court found the five defendants . . . guilty for wrongly accusing the plaintiff . . . of having communist sympathies.

[I]n this case, both the defendants and plaintiffs fought against communism during the Second Indochina War. All those interviewed invoked a word commonly used within the Vietnamese émigré community to describe the act of wrongly accusing someone of communist sympathies: chụp mũ. [...]]]> I was recently listening to a program on the rise of “red-baiting” in some Vietnamese-American communities. It’s apparently becoming a common rhetorical strategy:

On April 16, 2009, the Thurston County Court ruled in favor of a Vietnamese man who sued for defamation. This case was the first of its kind in the state of Washington. . . . The court found the five defendants . . . guilty for wrongly accusing the plaintiff . . . of having communist sympathies.

[I]n this case, both the defendants and plaintiffs fought against communism during the Second Indochina War. All those interviewed invoked a word commonly used within the Vietnamese émigré community to describe the act of wrongly accusing someone of communist sympathies: chụp mũ. As this trial brought to light, chụp mũ is a widespread practice among Vietnamese community leaders. However, it is very rare for a person who has been chụp mũ to sue his/her accusers.

This might be an interesting precedent for those accused by shock jocks of being socialist, Marxist, Bolshevik, or in favor of concentration camps.

It also brought to mind the vituperative attacks often directed at Gretchen Morgenson of the New York Times. As a recent profile noted, many are bizarrely dismissive of her pathbreaking work:

“The consensus view of her among actual business people I know is pure contempt,” says [a source who] has represented high-profile business-press targets. “Her work has a sort of drive-by, potshot quality to it that leads to habitual mistakes and ideological laziness. She is reflexively opposed to free markets and assumes bad faith in almost every subject or person she examines.”

[But] many will be surprised to learn she’s a moderate Republican. “I believe in capitalism,” she says. “To me it’s natural that I would go after the people who are wrecking it.”

What becomes apparent over several conversations is that Morgenson is a business reporter–no more, no less. She’s more likely to mention investors as her main concern than readers or “the public.” Her views are pragmatic, sometimes small-bore to the point that her detail-laden writing can turn off casual readers. Her fixes are meliorative and not particularly original–better regulation, more competition. Her radical idea is, basically, that regulators should regulate, rating agencies should rate according to the merits of the credit, corporate compensation committees should set executive pay at arm’s length, directors should look to the interests of shareholders first, large shareholders should act like the owners they are and mortgage lending should be something other than a game of three-card monte. That these views are seen as “antibusiness” in some circles tells us less about Morgenson than about the ethical breakdown among this generation’s corporate elites.

People like Morgenson realized that the abuse of the capitalist system could lead to its decline around the world. It’s sad to think that in today’s lapdog business press, shibboleths have often supplanted sober appreciation of the stellar work she’s done.

Tim Greaney on competition in the insurance market.

Tim Jost on the prerequisites for a successful co-op compromise.

John Jacobi on public plans and chronic care.

Nathan Cortez on comparative health reform.

Tamara Coley on quality of care differences by insurance status at community health centers.

Michael Ricciardelli on the Medicare Part D Doughnut Hole and private insurer CEO compensation.

Jacob Hudnut on failed state health reforms.

Justin Goldstein on insurance exchanges.

We’re trying to develop a new resource collecting news and commentary on health reform. The eventual vision is to have [...]]]> Now that we’ve got a critical mass of posts, I just wanted to announce Health Reform Watch, a project of the Seton Hall’s Center for Health & Pharmaceutical Law & Policy. We’ve been honored with some great contributions, including:

Tim Greaney on competition in the insurance market.

Tim Jost on the prerequisites for a successful co-op compromise.

John Jacobi on public plans and chronic care.

Nathan Cortez on comparative health reform.

Tamara Coley on quality of care differences by insurance status at community health centers.

Michael Ricciardelli on the Medicare Part D Doughnut Hole and private insurer CEO compensation.

Jacob Hudnut on failed state health reforms.

Justin Goldstein on insurance exchanges.

We’re trying to develop a new resource collecting news and commentary on health reform. The eventual vision is to have bloggers covering certain “beats” (including Medicare, Medicaid, state reforms, licensure rules, etc.). I think Managing Editor Michael Ricciardelli has done a great job getting a wide variety of relevant content online. Please let him or me know if you have any suggestions for improving it.