Gruber’s bad political analysis driven by bad economics

Like the never-seen “Secretary” in the “Mission: Impossible” series, President Obama and House Minority Leader Nancy Pelosi (D-Calif.) — she was the Speaker until the voters responded to the enactment of the Patient Protection and Affordable Care Act (ACA) — and their supporters now disavow any knowledge of the actions of Massachusetts Institute of Technology (M.I.T.) economics professor Jonathan Gruber. And with respect to his central role in the preparation of analyses in support of the ACA, or their numerous meetings with him in their offices or their proud invocation of his professional authority in response to fierce criticism of the legislation during that public debate: They now can barely remember him. The TV show was real entertainment — if only I could obtain one of those masks transforming me into a handsome secret agent man — but not nearly as amusing as the desperate effort now to relegate Gruber to the dustbin of political history by denying a link between the 2010 enactment of ObamaCare and Gruber’s analytic modeling of its purported effects.

{mosads}Sadly, the Internet has a long memory, the upshot of which is that Gruber the politician turns out to have been too clever by half. Thus do the architects of the ACA now find themselves engaged in a massive clean-up operation because of Gruber’s recent comments on the various mendacities leading to passage of that law, the subject of loud front-page headlines. And thus has his proud honesty about his past dishonesty been highlighted in ways both conspicuous and deeply negative, and it is obvious that he now must wish that he had been rather less honest during various academic conferences and the like on the passage of the ACA. That he viewed the voters as “stupid” when he actively promoted disinformation during the ObamaCare debate suggests that he does not understand the difference between stupidity and the effects of imperfect information. This is darkly amusing for a member of the economics intellectual tradition, a significant part of which is driven by analysis of the behavioral implications of information costs. Nonetheless, stupid the people are, in Gruber’s view, as illustrated by his dim evaluation of the coverage choices made by seniors; like children, they would be better off were experts and officials to limit their options. More important, and far more appalling, is his explicit view of the proper relationship between the citizenry and the state in a constitutional republic: It is wholly appropriate to lie to the rubes as much as necessary so as to further leftist political aims. This guy is a “scholar”?

Forget Gruber’s earlier dissembling about whether some of the central provisions of the ACA are taxes: He now admits that, yes, they are taxes after all, even if not labeled as such, designed to redistribute wealth to constituencies favored by the White House and, presumably, by Gruber. Forget his obfuscations about the incidence of those taxes, that is, the identity of who would bear the attendant burdens, to wit, the young and the healthy and the beneficiaries of employer coverage. Forget Gruber’s glee at the success with which he and the congressional majority exploited the requirement that the Congressional Budget Office (CBO) analyze the fiscal implications of the bill as it was written, with frontloading of taxes, backloading of spending and the various other dishonesties designed to create an utterly false deficit-reduction narrative.

Forget his celebration of the “lack of transparency” as “a huge political advantage.” Ignore his silence as the president, as administration officials, and as supporters in Congress repeated the falsehood that “if you like your [insurance] plan, you can keep it”; from the very beginning that was a promise blatantly preposterous to anyone — obviously including Gruber — who understood the implications of a government mandate that employers offer coverage and that individuals buy it. (Any such mandate requires that the government define “insurance,” which means that some plans will not qualify.) Nor did Gruber comment on another reality: The effort to “reduce costs” (that is, payments) meant by necessity that physician and hospital networks would be narrowed. You might not be able to “keep your doctor” regardless of how much you liked him or her. And forget Gruber’s admission that under the plain language of the ACA, only coverage obtained on “exchanges established by the states” and not by the federal government is eligible for subsidies, a crucial issue now before the Supreme Court.

Instead, let us focus on a larger reality: Professor Gruber practices rather poor economics.

Can that possibly be true of a full professor at M.I.T.? Well, yes. Economists may disagree about many things, but absent among them is the central role of incentives as determinants of behavior, an eternal truth that applies fully to government. In the context of ObamaCare, government has interest groups rather than patients, and dollars not spent on a given constituency can be spent on others. Accordingly, government as a buyer of medical goods and services — or as a rule-maker for the ObamaCare exchanges and the insurers participating in them — has incentives to opt for lower-priced alternatives over higher-priced ones in ways that do not reflect the incremental advantages of the latter, if any. In particular, the drive to reduce explicit budget costs — to claim that the ACA is producing efficiencies — biases choices in favor of current budget savings at the expense of benefits enjoyed by the beneficiaries of a given program, even relative to the decisions that patients would make if confronted with the full costs of their choices. That the CBO estimates of budget costs themselves are biased by an expansion of price controls, whether explicit or implicit, makes matters worse by exacerbating the confusion of budget outlays with true resource costs. Nor does Gruber make any adjustment for the inefficiency costs (“excess burden”) of the tax system used to pay for expanded public insurance programs.

This powerful incentive on the part of government policymakers to view “costs” narrowly as the CBO estimates of budget outlays (or aggregate health care expenditures) for which constituencies compete is exacerbated by the short time horizons of public officials. Outlay savings are available today (or during a given policymaker’s term in office). To some substantial degree, the potential adverse effects of the bias toward limiting spending will be felt in the future. Other than, perhaps, the effects of the corporation income tax, there is little reason to believe that government as an institution has incentives to adopt a time horizon longer than that relevant for the private sector. And such policies as campaign finance restrictions may have had the effect of weakening the constraints that the political parties can impose upon officeholders: As the parties are long-lived institutions with some incentives to adopt time horizons longer than those of particular officeholders, the net effect may be a tendency to discount the future effects of policies more heavily.

Over the longer term, this bias toward savings defined in terms of spending may engender an adverse effect: a reduction in the flow of research and development investments in new and improved medical technologies, yielding fewer new medicines, devices and equipment. While research and development investments might be reduced quickly, the ensuing flow of new medical technologies clearly would not be affected for several years at a minimum. This means that there is an incentive for policymakers with short time horizons, again, to discount that effect relative to the spending savings that might be achieved quickly, to be used to subsidize other constituencies.

Nowhere in Gruber’s analytic pronouncements about the ACA do we find any consideration of such impacts. Instead, we find assertions to the effect that the (assumed) expansion of insurance coverage under the ACA will “increase economic activity” by increasing the demand for medical services and thus the number “of medium-skill jobs that our economy desperately needs.” He does not mention the aggregate incentive toward part-time employment created by the ACA; nor does he expand his analysis to the sectors that necessarily will shrink as resources are shifted into the medical sector. Is there a free lunch? Implicitly, Gruber says yes: Formerly uninsured individuals upon finding themselves “covered” will be able to take money out of “low interest liquid accounts,” saved for future medical expenses, and spend it on “consumer goods.” About those “low interest liquid accounts”: Are they stuffed into mattresses? Or are they part of bank reserves and thus available for lending?

Never mind. How does Gruber’s analysis apply to low-income groups with little savings but suddenly confronted with a mandate to pay nontrivial premiums and out-of-pocket costs? Medicaid is no answer, as the price controls (low reimbursements) that Gruber ignores have reduced access to actual healthcare even as “coverage” has expanded. Moreover, what becomes of Gruber’s argument now that premiums and out-of-pocket expenses (and thus the need for “low interest liquid accounts”) are higher for the losers (see above) in the ACA system? Even within Gruber’s analytic framework, it is far from clear that aggregate spending on consumption rises.

That intellectual problem is part of a larger one: Gruber seems actually to believe that an expansion of insurance “coverage” is the same as an expansion of actual healthcare, that is, that the ACA somehow by magic will produce the real resources needed to provide healthcare services to millions of newly insured people. As those resources are drawn out of other sectors, what becomes of prices, employment and the other relevant parameters there? Gruber does not tell us.

Professor Gruber has written a textbook on public finance, and one of the standard topics that he covers is the problem of pollution externalities, along with a discussion, again standard, of tax remedies. Does Gruber recognize that he is very likely to have polluted the public view of economists and their policy pronouncements? Perhaps he will consider a self-imposed tax on his consultant earnings paid by the taxpayers.

Zycher is the John G. Searle scholar at the American Enterprise Institute.