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February 8, 2006

This Week In Entitlement Reform

In this the federal budget week, blogland brings a couple of interesting discussions on social security and health policy reform.  First up (in reverse chronological order) is the latest Econoblog installment featuring Mark Thoma and Andrew Samwick.  This, from Andrew, neatly summarizes my thinking about the foundation on which social insurance reform must be built:

As global trade increases, the U.S. loses its ability to be the least-cost producer if it stipulates that employment contracts must include taxes for all manner of redistributive programs. If we are to purse both social insurance and economic growth, we need to consider alternatives to the employment relationship as a way to deal with our health and retirement needs.

Mark agrees, but is skeptical about solutions that rely primarily on the private sector:

There are substantial problems -- market failures -- in the private-sector provision of health and retirement insurance that are not easily overcome with market-based regulatory schemes.

For example, adverse selection issues, where high medical-cost individuals are excluded from coverage or are forced to pay extremely high premiums, plague health-insurance markets. High administrative costs of private health insurance are another problem, and there are problems in the private provision of retirement insurance as well. When markets fail, the insured often pay for the uninsured, and for these and other reasons I believe it's best to share the burden more generally through government programs that require individuals to contribute insurance premiums.

I confess that I don't quite buy that one.  As Andrew points out, there is a distinction between government regulation of an industry and government production of the service that the industry supplies:

The first mistake is to make insurance voluntary when we don't subsequently exclude those who need care from getting it at the public's expense. We should make health insurance mandatory, but we should do so by putting the mandate on the individual, not the employer...

The second mistake is to allow the tax code to distort the type of insurance offered. Premiums are fully excludable from taxation, but out-of-pocket expenses are only imperfectly tax deductible. This generates extremely generous, first-dollar coverage and little incentive for individuals to economize on the care they receive. Rather than the Bush administration's proposal to make out-of-pocket expenses deductible via expanded medical savings accounts, I favor removing the excludability of health-insurance premiums from taxable income.

The third mistake is to force young workers to subsidize older workers in group health-insurance markets. Insurance is supposed to transfer resources from those who have unpredictably low expenses to those who have unpredictably high expenses.

I agree with Mark that the government should mandate coverage, but that doesn't mean the government should centralize the provision of services or dictate their terms. I would prefer to fix some of the obvious mistakes before making such radical changes to the system.

Andrew's diagnosis gets a second from Dr. Becker in this week's installment of the Becker-Posner Blog:

...many of the problems in the health system are correctable with the right policies. I believe the three most important defects are the over 40 million Americans who are not insured, the weak incentives to economize on unnecessary medical spending by most people covered by some form of health insurance, and the tying together of health insurance with employment as a result of special tax privileges provided to employers.

Arguably the best parts of President Bush's State of the Union address are his suggested reforms in the health care system. They do not fully attack all the problems, but they do offer significant improvements. I will concentrate particularly on his proposals to extend Health Savings Accounts (HSAs), and to improve the portability of health insurance when workers change jobs.

Professor Becker goes on to an extensive discussion of the HSA proposal, the benefits of such a plan, and a very wise observation about at least one of the costs:

President Bush has proposed changes in the health care system that initially will reduce tax collections and increase federal spending at a time when the US government is already spending too much and running a sizeable budget deficit. However, by making the health delivery system more efficient, this important set of proposals in the State of the Union address might end up raising tax collections, and certainly would improve the efficiency of the American economy.

There are plenty of other interesting things in these two items -- the discussion, for example, of the Liebman-MacGuineas-Samwick social security reform proposal which I have endorsed (and which was met with a resistance I find as baffling as members of Congress giving themselves a standing ovation for doing absolutely nothing about fixing a system that clearly needs to be fixed).

Really, I beg you.  Read the whole things.


UPDATE: William Polley agrees the key question is "How much social insurance should be provided by the government and how much should be provided by markets." 

There is much relevant discussion at Angry Bear: here, here, and here.  It's fair to say we've taken different sides on this one.

Kevin at Truck and Barter points to research by Alice Zawacki and Amy Taylor on the relationship between employer characteristics and the provision of health insurance benefits. 

You'll find some thoughts about the Posner half of the Becker-Posner conversation at winterspeak

Max remains a consistent reform-skeptic (at least as it relates to social security).