Why I like Obamacare

There are a couple of reasons.

First, it’s rare that politicians are still in office when the unintended consequences of their grand plans begin to come to fruition.

Second, a key problem I have with government is the feedback. Government activities are intention-driven, rather than results-driven. As Milton Friedman once said (HT: Cafe Hayek):

Well, there are fewer limits on what you can promise than on what you can deliver.

But, since Obamacare touches everybody, I think results may matter more. 


Unintended Consequences of Work Space Design

Is your office making you unproductive? According the Wall Street Journal and the study they reference, yes.

I’ve lived through this lub-dub cycle a couple of times in my career. More “open” and “collaborative” workspaces is one of the mythic magic potions managers believe will spur a company’s culture into producing stellar growth.

The problem is…it doesn’t work.

In my experience, people will find ways to get some privacy and these days, there are a lot more options to do that. They’ll camp out in a meeting room or go find a quiet corner at the local coffee shop. 

They get less done at work since open spaces create more opportunities for interruptions. I use to sit with two work mates in a tight space. We noticed that when two of us were there, we talked much less than when all three was there. Like Metcalfe’s Network Law, the third person in the network increased the odds that we’d happen upon conversations one or the other would find interesting. 

Often a conversation might start between A and B, then C would find something said to be interesting and jump in. A might even drop out because he found the subject uninteresting. But, having C there, made it more likely that the conversation would continue. 

Beliefs in office layout schemes does produce growth for office furniture makers and moving companies, though.

Additionally, the guests in the Harvard Business Review podcast from April even say that group brainstorming may not be as good or any better than individual concentration.

This, too, is something I have confirmed with my experience where I’ve seen group brainstorming sessions used as domains for folks who like the sound of their own voice. I have, however, seen group brainstorming sessions work well when everyone in the group felt comfortable with each other.

I’m not sure if this would work any better, but what I would like to see work groups within a company have more say in how their space is laid out. There is a lot of resistance to this at most firms, where it is someone’s job to order office furniture and move it. They will argue for efficiency and economies of scale for making larger purchases and never will the benefits of more productivity be weighed against the costs of less efficiency.

Assume the opposite

Unintended consequences of legislation are sometimes hard to predict.

But, it’s convenient that our politicians help us out by giving their packages of legislation names that should clue us into to what those unintended consequences will be. Whatever the name of the legislation, assume the opposite will happen.

For example, the name of the Obamacare legislation is the “Affordable Care Act,” so I expect it to make health care less affordable. Not so.

In 2009, the stimulus bill was passed under the name “American Recovery and Reinvestment Act”. Still trying to recover.

A good question is why does legislation so often produce the opposite of the intended result?

The cause of this is misdiagnosis of the problem and aiming solutions at those misdiagnosed problems distort things and cause more of that problem.

Thoughts on taxes III: Social Engineering

In my original Thoughts on taxes post, I listed this as the second reason I prefer a simple tax system:

  • We don’t get the social engineering benefits that we think we do from the cleverly designed tax code that we have. We may only get bad outcomes.

I would prefer that we only think of taxes as a way to fund government, but many folks can’t resist the temptation to make the tax code serve double duty by also trying to use it for social engineering. That is, to encourage more behavior that we think of as good (like owning homes, earning income and going to college) and less behavior we think of as bad (like earning high income and making short-term investments:)).

Well, it’s not that we think earning a high income is bad. It’s that many people believe income inequality is bad and they think tax rates can balance that out, but as we’ll see shortly, progressive tax rates may contribute to income inequality.

I believe this desire to use the tax code for social engineering has two problems. First, and most important, we don’t actually realize the social engineering benefits. Those just get pushed to other margins through by distorting natural incentives. More on that in bit.

Second, it stands to reason that the natural rewards for good behavior (like buying homes, going to college and long-term investing) should be enough to encourage that behavior without any special tax treatment.

To think about how trying to reward good behavior in the tax code pushes the supposed benefits to other margins, consider the home mortgage interest deduction. We’ve been brainwashed to believe this is good because it encourages home ownership.

We’ve also been brainwashed to believe that home ownership is a good thing.

But, why exactly is home ownership something that we should encourage? Arnold Kling wonders this as well. What’s wrong with renting?

Home ownership isn’t for everyone. Home ownership doesn’t necessarily make one wealthier, wiser or more responsible, despite that conventional wisdom that fed the housing bubble.

Have you heard how much ownership the mortgage interest deduction has encouraged? I haven’t. If there is research on this topic, I haven’t seen it and a couple (admittedly quick) Google searches didn’t immediately turn up anything. If you can point me to any research on the topic, please do so in the comments.

But, even if there is research, I’m skeptical that it would thoroughly consider all the possible distortions to natural incentives the mortgage interest deduction could be causing and how those distortions have moved the benefits of home ownership to other margins.

Even I can’t know all the distortions caused by this part of the tax code, but I am willing to bet that the my following list of possibilities is something most folks haven’t ever considered. I know this because I bring it up to folks all the time and the response so far has always been “Wow, I never thought of that.”

I think, perhaps, the biggest distortion that may offset most of the social benefit of the deduction is higher home prices. Believe it or not, the value of the mortgage interest deduction benefit is accounted for in higher home prices.

Some folks I’ve discussed this with have a hard time believing it. They tell me that they didn’t explicitly consider that when making an offer on their home.

How market prices work is hard to understand. While my friends may not have explicitly considered it, the folks they were bidding against may have and they had to beat those bids to get the house. So, they did not have to explicitly consider this benefit for it to be built into the price.

If you still don’t believe me, you should also consider why the real estate brokers and home lenders actively lobby to keep the mortgage interest deduction. Do you think they are just looking after our best interests? No. Higher home prices means high transaction prices for real estate agents (7% commission x a higher number is a higher number).s.

The mortgage interest deduction also encourages folks to take out larger loans, keep that debt out longer and have less equity in their home than they might have otherwise.

These can weaken someone’s financial position and gives less incentive to be responsible home owners. As we found out in the housing bust, owners with no equity are no more responsible than renters who do not have to pay rent.

If I had not considered how taxes distort natural incentives before, this list of four possible distortions of the mortgage interest deduction would at least make me think more about the topic and possibly consider distortions driven by other socially engineered pieces of the tax code.

Could the most progressive income tax code of all developed countries actually be contributing to income inequality? In other words, does the higher marginal rates on higher income lead high income folks to seek higher rates of gross income to offset those higher tax rates?

Like home prices, this isn’t intuitive, but is the same thing. Labor is price, just like a home price is a price. If home prices adjust to include tax benefits, labor prices can adjust to cover tax costs.

Don’t think so? Imagine one of your favorite Hollywood stars. Even better if he happens to be vocal advocate for increasing taxes on the wealthy (e.g. Matt Damon).

Now, also consider the clout of your highly paid actor. Does he sell tickets? If so, he has some good earnings leverage over the studios that sign him to their projects.

Next, think about what happens in his next movie negotiation if he gets his wish and tax rates on high incomes are increased. Let’s say before he was banking $10 million per movie, or $6 million after tax.

If tax rates increase from 40% to 60%, for example, do you think he’ll settle for taking home $4 million on his next project? Probably not. Why should he? Do you think he would recognize the $2 million hit as a consequence of his advocacy? No.

His agent will ask for $15 million so his client can take home the same $6 million as he did before. And the actor will never connect the dots on how the tax rate actually made his gross income even more “inequal” ($15 million vs. $10 million) to the folks who didn’t see a 50% increase in tax rates.

But, we don’t need to guess how tax rates can distort a rich actor’s incentives. What if a neighbor, who you don’t know well, is planning an extended vacation next summer and offers to pay you to mow his lawn while he’s gone. He tells you it takes an hour to mow.

What price would get you to agree to his offer? $20? $40? $50? $100?

Which price raised your interest level?  I’d have tepid interest for $50 and be much more interested for $100. But, everyone is different because we all have different opportunity costs.

You agree to the offer at your desired price, but then find out that one of the Homeowner Association covenants, that you never read, states that the HOA gets 50% of any such neighbor-to-neighbor dealings. Now we’ve cut the fee your attention-getting-fee in half.

Are you still interested in mowing his lawn? No. Your opportunity costs are higher than that amount, else you would have picked that number the first time.

What would make it all better? If your neighbor doubled the fee to offset the HOA’s 50% tax.

See, our own behavior and incentive distortions are not much different from the rich Hollywood actor and it’s plausible that distortions caused by unequal tax rates winds up being priced into labor, which contributes to the ‘income inequality’ that so many folks get bellyaches over.

Writing this post has made me think about a new game to play on this blog: Guess the incentive distortions. Periodically, I’ll pick a policy and see if I can name a few possible distortions that might make the policy less desirable than it sounds.

Incentive distortions caused by tax rates are rarely discussed. When they are, they are often too quickly discounted. 

Good example of unintended consequences

On his blog, International Liberty, Dan Mitchell wrote that he hopes Paul Krugman…

…is right in that [Paul] Ryan wants “to make life harder for the poor” if the alternative is to have their lives stripped of meaning by government dependency.  And I agree that it will be “for their own good” if they’re motivated to join the workforce.

…even though Mitchell is aware that Krugman “wants readers to draw the opposite conclusion,” that it’s wrong for Ryan to want this.

I can hear my liberal friends now. Compassionate folks should want to help the poor, right? Ryan and right-wingers aren’t compassionate. They don’t want to help the poor. 

Mitchell also linked to a previous post of his from 2010, which contains this chart:

I remember reading this compelling point about unintended consequences in Thomas Sowell’s books and columns. The poverty rate had been declining prior to government involvement to try to help it. The country was becoming wealthier and more people were being lifted out of poverty.

Then government ‘declares war’ on poverty, since the intention of helping the poor is noble and a good way to attract votes. Who wants to vote against the poor, after all?

But what about the outcome? The declining trend of the poverty rate stopped right after the war declaration and then stabilized thereafter and began exactly what I don’t like about government programs — the positive reinforcing failure feedback loop.

We’ve spent increasing sums of money, through government, to combat poverty. It’s still here. As Daniel Hannan wrote in his book, The New Road to Serfdom:

It is a stock phrase of virtually every European politician, regardless of party, that “a society is judged by how it treats the worst off.”  Plainly, then, there must be something selfish — and possibly racist — about a people who keep voting for a system that treats the most needy so pitilessly.

It rarely occurs to critics that there might be better ways to measure the efficacy of welfare state than by size of its budget.  Indeed, in a truly successful social security system, budgets ought to fall over time as former recipients are lifted into better and more productive lives.


Not at all surprising

In this post from last December, I wrote about the move to make kids meals healthier.

My wife predicted that the political class and the restaurants would get political props for providing healthier choices. She also predicted that people would buy fewer kids meals and just order ala carte to get the food they wanted.

This story appears to support those predictions.  As a follow-up, we have ordered many fewer Happy Meals since then, opting instead for ala carte to get more fries and to avoid the accumulation of cheap toys. And, as I mentioned then, my kid eats plenty of fruits and vegetables.

This is a lesson politicos know well. They can make it look like they are achieving great things, when they really just helped the restaurants sell other food and/or caused more packages of apples to be thrown in the trash. I wish more folks would wise up to the game.

The greatest and most skilled tricks of magicians and politicos is to divert your attention from what is really happening.

Careful what you wish for

In today’s Wall Street Journal, Holman Jenkins writes about NYC Mayor Bloomberg’s ban on BIG SODA.

I know many people who believe universal health care is a good thing. But these people also don’t take the 30 seconds required to ponder the subject beyond that nice sounding intention.

It’s not long before the very same people who pushed us to provide health care for everyone, begins to tell you how to live because they determine that your lifestyle choices are costing the rest of us too much.

As Jenkins writes:

But by the state’s own estimate, it spends $8 billion annually treating obesity-related ailments under Medicaid, which is how 40% of city residents now get their health care.

Here is the ultimate justification for the Bloomberg soft-drink ban, not to mention his smoking ban, his transfat ban, and his unsuccessful efforts to enact a soda tax and prohibit buying high-calorie drinks with food stamps: The taxpayer is picking up the bill.

The next step: If they don’t succeed in changing your lifestyle, to save us money, then they will deny you access to universal health care. After all, your choices show you are too irresponsible to deserve it.

Now, to me, that doesn’t sound any more compassionate than letting the people who made bad choices in a freer health care market figure something out, but moral and logical consistency isn’t always the strong suit of universal health care busy bodies.

So, it’s not long before you discover that universal health care is not actually universal. For the hope of not having to pay for your medical costs directly, you’ve traded your choice in the matter away to a group of busy bodies. I hope your BMI and cholesterol levels meets their approval.

But, the bigger issue for me in Jenkins article is the 40% of NYC residents on Medicaid! That’s worth a WSJ column by itself.

This is the very reason NYC is the hotbed of busy body activity — because a large percentage of the population is on government health care. So, the busy bodies rationalize their busy bodiness by wanting to save everyone money.

It’s worth asking why such a large percentage of New Yorkers are on government health care. If you guessed because of previous government interventions in the market, I believe you are correct.

New York has already placed some restrictive supply requirements, or mandates, on health insurance that has driven up insurance costs there, resulting in fewer people buying it.

One such condition requires that health insurers cover pre-existing conditions. That has driven up the cost of health insurance in New York to the point where few people can afford to buy it until they get sick. Even then, many can’t afford it, so they turn to Medicaid.

I used eHealthInsurance.com to compare the price of an individual health insurance plan for myself in my zip code and Manhattan. In my zip code, it would cost me $70 per month to replace the coverage I currently get through work.  In Manhattan, a similar high deductible plan goes for $345, nearly 5 times as much. You don’t want to pay deductibles? $1,075 per month or $12,900 per year.

I also notice two other things in the comparison worth mentioning. First, my zip code has 92 plans to choose from. Manhattan only has 18.

Second, New York has a type of plan that is not offered in my zip code. It only covers hospital expenses . You pay your doctor fees out-of-pocket. That is the cheapest plan offered in New York City.

It’s not hard to see why they offer such a plan. You can save about $10,000 in insurance costs with this plan. You are betting that your doctors fees will be less than that.

So, here again, we see the result of government intervention causing unintended consequences that invites even more government meddling.

Update: The Wall Street Journal did publish an editorial sharing my concern for busy bodies using government health care spending to rationalize even more intrusion (HT: Mark Perry at Carpe Diem). Here’s the key, well-worded excerpt:

But the real lesson here is that a government that pays most health-care bills will soon be dictating the everyday behavior of its people. An America that needs government to protect its citizens from 20-ounce sodas has bigger problems than obesity.

Unintended Consequences Realized?

In this post, I predicted that one unintended consequence of shrinking the fry size in a Happy Meal and including fruit — for the sake of health — would be higher sales at McDonald’s as folks would choose to order extra fries to make up for the reduced size.

McDonald’s just reported a 7.4% surge in sale in November.

Of course, its press release makes no mention of the Happy Meal change as a driver of the sales.  They claimed that the increase was caused by higher breakfast demand, the Peppermint Mocha and a McNugget promotion.

Could be.

All I know is that having contributed to press releases in the past, I know that reasons given for performance changes can be arbitrary and sometimes they can be hard even for the company analysts to decipher.

Unintended Consequences

McDonalds Happy Meal

Let Politicians Decide

My local McDonald’s recently started complying with the wishes of the political class.  Over the weekend, we purchased a Happy Meal for my kid.  It came with a reduced, 100 calorie fry packet and a bag of sliced apples.

My kid, who by the way eats fresh fruit everyday not provided by fast food companies, was mortified with the smaller fry packet.

My wife instantly understood the unintended consequences.

She said, “Well, that’s just going to cause people to spend more money.  They’ll either buy an extra or larger order of fries to make up for the fries taken out of the Happy Meal.  Or, they’ll just buy the kid’s stuff ala carte to get what they want.  No wonder McDonald’s supported it, they probably realized it will increase their sales.

Let’s review this situation.

1.  Political class deems kids meals with toys unhealthy and persuades (by threatening to legislate) companies that sell kids meals with toys to make them “healthier”.  

Result:  Voters see the political class as making a positive change.

2.  The bean counters at the companies that sell kids meals with toys run the numbers and determine there’s a good chance people will order extra stuff to make up for what’s taken away.  Companies that sell kids meals support the wishes of the political class. 

Result: Political class looks like they have done something positive and company looks like it has done something positive.

3.  After customers realize that they no longer get what they want, they purchase more to make up the difference or do without. 

Result:  Customer choice is reduced or customer cost is increased.  Many of the apples that do make it into kids meals go to waste.

On net, the political class and the company are heralded by non-vested parties for doing something positive.  Customers pay the price and continue making unhealthy food choices.

So while the political class and company reap the political benefits, the company benefits from increased sales — nobody is actually healthier.

This is the same poor logic that I pointed out in this post.  Except this time it has to do with food and health rather of housing or wealth.

Poor logic:  “People are unhealthy because the food provided by companies is unhealthy.  Let’s encourage those companies to provide healthier choices.”

Better logic:  “People are unhealthy because of the food choices they make.  Let’s encourage folks to eat healthier.”

Unintended Consequences Matter

I linked to Aaron McKenzie’s disentanglement of self-interest and greed here.

In this post, Arnold Kling recommends reading an essay called Capitalism and the Jewish Intellectuals.  In it, he writes, the authors believe intellectuals are hostile to capitalism because of this entanglement of self-interest and greed.  They interpret “incentives matter” as “greed drives capitalism.”

So, they recommend a way to get intellectuals over that hump.  Kling poses their recommendation in the form of a Q&A:

Q: How would you break down that hostility to capitalism?

A: By de-emphasizing “Incentives matter” and instead emphasizing that “unintended consequences matter.” That is the message of Adam Smith. It is the message of Hayek. Once we embed people in complex economic and political systems, selfish intentions can turn out well (because of competition), and good intentions can turn out badly (because of imperfect knowledge).

Though, based on Aaron’s advice, I would reword part of the answer to:

…self-interested intentions can turn out well (because of competition)