Should the feds provide health insurance?

Interesting post by Harvard professor and former head of Bush 43's Council of Economic Advisers Greg Mankiw. Mankiw is quite skeptical:

Consumer choice and honest competition are indeed the foundation of a successful market system, but they are usually achieved without a public provider. 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.

One issue that Mankiw does not touch upon is adverse selection. The pool of the uninsured is quite heterogeneous, containing those who lack income, those who expect to be healthy (from all income ranges), and those who expect to be unhealthy (again from all income ranges). Insurance companies can collect limited information about each person who shows up as a potential purchaser and will try to limit their losses through denying coverage or by not treating pre-existing conditions. Knowing that the pool of customers will be skewed toward the unhealthy (and the risk averse), the insurers have to charge a higher price than they would if everyone was forced to buy coverage. This is a variation of the "lemons problem;" it also explains certain aspects of the market for used cars.

Two ways to deal with this issue without the government entering the health insurance business: (1) require everyone to have health insurance and (2) provide subsidies to those in certain income categories.

How many uninsured?

On precisely this day one year ago I woke up in the ICU of Rex Hospital. I like to think I take pretty good care of myself, but the ICU is a place you can get to visit if you get a bad enough case of bleeding diverticulitis and you have good health insurance coverage -- both of which I had. I ended up spending four evenings at Rex and the total tab was over $20k. I probably paid no more than 10% of the bill. I consider myself very fortunate.

Today's WSJ has an article on how difficult it is to estimate the number of uninsured. Some are illegal immigrants who would not become insured under any of the proposals of which I am aware. There are all sorts of potential estimation errors. The official data come from household surveys, not employer reports. Health insurance comes in all sorts of flavors: deductibles, copays, what gets covered, and maximum payouts all vary considerably. No one knows how many employers will dump coverage if the government starts its own insurance plan.

Frankly this is a tough problem, one where politically unaffiliated experts would have a hard time reaching agreement about what is in society's best interests. At this point it would be a fool's errand to guess what Congress and the President will do.

NC to start taxing services?

The General Assembly is seriously considering expanding the sales tax to include services, according to the Raleigh News and Observer. From a purely conceptual point of view, this idea makes a certain amount of economic sense. By levying the tax solely on goods, consumers have a government-created incentive to substitute services for goods. Also, services represent a large and growing share of GDP, making it harder and harder for the state to generate a given revenue target from taxes on goods alone.

Some legislators are concerned that the new tax will cover some, but not all, services. Apparently the drafters of the legislation think movie tickets and hair cuts are fair game, but not legal and accounting services. I am having a hard time in seeing the logic here:

Sen. Dan Clodfelter, co-chairman of the Senate committee that deals with taxes, said white-collar professional services were excluded because most of their costs are tied up in health care and real estate, and the higher taxes would raise those industries' costs substantially.

I presume Sen. Clodfelter checked out deadweight loss calculations before he made that statement!

Here comes the Jack Welch MBA

Famous ex-CEO, best selling author, sought-after speaker and media celebrity Jack Welch has decided to launch his own online business school. An investor group (Welch has a 12% stake according to the Wall Street Journal) is buying a bankrupt private school in Cleveland that was well on its way to losing its accreditation. Welch and his wife Suzy (former editor of Harvard Business Review) will help plan the curriculum and recruit faculty. Welch also will record a weekly video for students.

Privately-owned online schools such as the University of Phoenix have captured a significant share of the MBA market. Their appeal has been based largely upon convenience and relatively low cost. As the director of a face-to-face MBA program that costs about 50% more than the advertised price of the Welch MBA, is this going to keep me up at nights?

Maybe. I think the key factor will be the success (or lack thereof) that Welch U has in attracting faculty. Suppose Jack opens his checkbook and gets a team of superstars to be his lecturers: Michael Porter for strategy, Jeremy Siegel for finance, etc. Also suppose he keeps it open and pays enough to attract solid faculty from mid-tier business schools to actually engage with students on challenging assignments and projects. These might be recently retired faculty whose CREF accounts look like mine. At some scale you might be able to deliver this degree online for $21,600 and make a decent ROI.

The other side of the coin: what if Welch decides his own personal star power is enough of a draw and sticks to the other aspects of the Phoenix business model? Hard to see how he beats Phoenix at its own game; he has to change the game by adding more value than his name.

At NC State we tell prospective MBAs to evaluate all programs based on (1) what they will learn in the classroom (which is more than listening to a lecture) and (2) what connections they will make with faculty, fellow students, and alumni that they can leverage for the rest of their careers. I am skeptical that Welch U will compete very well on the former dimension and very, very skeptical that they will make any effort regarding the latter.

A word of warning to all prospective Welch U faculty: don't end up in the bottom decile of the student evaluations; Jack originated the "rank and yank" personnel policy at GE!

Pomerleano: scorecard on financial reform package

Michael Pomerleano is a Harvard classmate who is now advising the Bank of Israel. His article yesterday in the Financial Times Economists Forum cautions that we have much work yet to do. Money quote:

There is a considerable disconnect between the stern principles enunciated by policymakers and their actions. Recently Jacob Frenkel made an astute observation: there are two types of investors: the ones with short memories, and the others with shorter memories. To that we need to add two set of policy makers as well. We are back to business as usual. How disappointing!

Falling behind in higher ed

I had been thinking about writing a piece on the value of higher education, but Peter McPherson, former president of my undergraduate alma mater Michigan State, and David Shulenburger have saved me some work in today's WSJ op-ed. Key points:

In Japan, Korea and Canada, more than 50% of young adults hold college degrees. Only 41% do in the United States.

The more educated a work force is the more value it adds to society. ... Since 1980, the gap between the earnings of those with bachelor's degrees and those with just high-school diplomas has widened. The ratio between the median earnings of men with the former and men with the latter grew to 1.99 in 2007 from 1.43 in 1980.

McPherson and Shulenburger argue that the US should set a goal of 55% of young adults with college degrees by 2025. Not sure that's the right number, but this is a discussion that we need to have, especially in light of all of the cuts in education funding that are taking place around the country. We will become a relatively poorer country if we do not figure out how to generate a higher percentage of young adults with college degrees.

The authors may be a bit too eager to let financing from the federal government play a key role in expanding access. Part of the debate needs to focus on access to higher education in terms of mode of delivery and cost. Tuition has tracked all too close to health care in terms of rising costs over the last 20 years. It is hard to see how we will make much progress on access to higher education without paying some attention to the cost side of the equation.

More on Safeway's health care

Friday WSJ op-ed column by Kimberly Strassel revisits the Safeway health care plan and adds one more important detail in the plan's incentive structure:

The company today fully pays for an array of primary and preventive visits and tests. But beyond that, employees have skin in the game. The company deposits $1,000 each year into a "health reimbursement account," which workers can use to pay for care. The next $1,000 in expenses is the employee's responsibility. After that, employees pay 20% of costs up to a $4,000 maximum.

Safeway workers these days treat that first $1,000 carefully, since anything beyond it comes out of their pockets.

Assuming employees can roll over anything left from the $1k endowment each year, this makes the employee very price sensitive for the first $2k in health expenditures each year. Reasonable people can disagree as to whether this is wise or not. In some situations we do not want individuals to be overly frugal with their health care expenditures (frankly, if you have strep throat I really would rather have you go to the doctor). But it is not like the current system is free of perverse incentives!

Whither financial regulations?

This week the Obama administration issued proposals for expanded regulation of financial markets. This should be viewed as an opening gambit. Goodness knows what, if anything, will make its way through Congress. The package expands the role of the Federal Reserve as a financial regulatory agency and that concerns me a bit for two reasons. First, the Fed has enough on its hands these days dealing with the money supply and short term interest rates; can any Fed chairman keep his or her eye on a vastly wider range of issues? Also, wider regulatory powers will invite enhanced political meddling from Capitol Hill and the White House, potentially compromising the Fed's independence.

Paul Krugman is pleased that the proposals regulate the "shadow banking system," or at least what is left of it. Krugman is less pleased that the plan does not address compensation issues more aggressively.

Simon Johnson thinks the proposals lack teeth. He raises the interesting point that if some banks have become too big to fail, shouldn't we cut them down to size? I am emotionally sympathetic to this view, but I am doubtful that (1) this could be done under existing laws (Sherman Act, Section 2: I don't think so) and (2) we could trust the government to have the power to decide how big is too big.

So far both links come from a left-of-center perspective. I will add more balance over the next few days.

Should MBA's take an oath on ethics?

This year a group of graduating Harvard MBA's decided to write and sign an oath that they would act to "act with utmost integrity and pursue my work in an ethical manner." Expecting no more than 100 of their classmates to take the pledge, the authors were surprised to see that at graduation more than half of their classmates had taken the pledge. The oath has now, as they say today, "gone viral" to other business schools and has received good press from Business Week and the Economist.

My reaction is mixed. On the one hand I am glad to see that more MBAs realize that the behavior of certain members of previous graduating classes helped create the current economic and financial mess. Further, I personally believe that some training in ethical leadership is an absolutely essential element in management education. This is now a required course in NC State's MBA program. If students want to take the oath -- and, more importantly, live up to it -- this activity could well end up being for the "greater good" (that's from the oath!).

My main reservations are twofold. First, the self-flagellation of MBAs and business schools is getting a bit carried away. If regulatory agencies such as the SEC had done their jobs and if the housing bubble had not been sustained through government actions (low interest rates from the Fed, various hijinks from Fannie and Freddie), today's economy would be in much better shape. Sure there are cases of market failure, but there was plenty of government failure as well. Second, managers have to walk a fine line in balancing the interests of society and the interests of their shareholders, as Milton Friedman argued many years ago. Those who end up on the wrong side of that line subject themselves and their organizations to severe penalties. Typical economics lesson -- there is a role for both carrots and sticks.

A quieter week at NC State (so far)

NC State has been in the news a lot lately, thanks to the events associated with the hiring of the former governor's wife and her promotion last year. The resignations of Chancellor Oblinger and Provost Nielsen come at a difficult time, given the funding cuts that NC State is likely to see in the next fiscal year. Interim Provost Arden and Vice-Chancellor Leffler have requested reports from each college indicating what would happen under different budget scenarios including a cut of as much as 18 percent. The College of Management submitted its report on schedule two days ago.

Regardless of what the legislature decides on the budget, NC State MBA students should not notice very much of an impact on class availability this fall. I have been working over the years to increase choice for students, including the recent offerings of one-hour courses and courses with a travel component scheduled during breaks in the semester. The one-hour course schedule for fall was just released for Nelson Hall and should come out any day now for the Research Triangle Park campus.

The greatness of NC State is a function of its academic programs, research, and outreach -- and success depends ultimaltely on the efforts of students, faculty, and staff. Dean Weiss, Pam Bostic and I continue to be fully committed to making the Jenkins MBA program one of NC State's most visible and recognized programs.

Some ideas on health care we probably will not see in the new legislation

Very interesting op-ed piece on the employee health plan at Safeway in last Friday's Wall Street Journal: "How Safeway Is Cutting Health Care Costs." In a nutshell Safeway's program provides discounts on health insurance premiums, copays, and deductibles to employees who meet standards for weight control, smoking, and other conditions that are known to contribute significantly to reduced healthcare expenditures AND are potentially controllable by employees. The article (written by Safeway CEO Steven Burd) claims that all testing and monitoring is done by an outside party, so at least in theory Safeway cannot arbitrarily limit the number of bonuses it hands out.

Does it work? Safeway has held its health care costs flat over the last four years, whereas the average employer has seen these expenditures rise by 38 percent. Now obviously there are many other factors driving the increase in health care: rising incomes translate into more demand for any normal good, third party payment dominates, tax subsidies for those insured by their employers, etc.

Burd's article focuses on the plan for nonunion employees; apparently the plan for employees covered by collective bargaining does not yet include these features (and he does not mention what has happened to costs in that plan). My guess is that this tells us a lot about the odds that nonsmokers will get a rebate on their health insurance premiums under ObamaCare.

First post

I am Steve Allen, professor of economics and management at NC State University. I also serve as Associate Dean for Graduate Programs in the College of Management and as a Research Associate with the National Bureau of Economic Research. I am starting this blog mainly to improve communication with students in NC State's MBA program. I will be blogging mostly on two subjects of which I am somewhat knowledgeable: economics and management education. Plus I will post random musings from time to time about everyday life. My only hope is that learning takes place somewhere.