Wednesday, February 1, 2012

Inequality is about the economy, stupid!

It's been strange watching the media reaction to Mitt Romney's taxes systematically miss the point: that a highly regressive tax structure that favours the hyper-rich is not simply a question of ethics or inequality, but also one of economics. The media's focus on Romney's fabulous wealth and whether or not it's "fair" that he has so much money and pays a much smaller percentage of income tax than Warren Buffet's secretary has resulted in predictable accusations of the politics of jealousy, "class warfare," and so on. It works to the advantage of people in Romney's tax bracket when the focus stays on his fabulous wealth -- simply proof that he is living the American dream -- and not on the implications for the economy of the regressive taxation system from which he benefits. From an economic perspective, the question is not so much whether Romney deserves to make so much money for his work overseeing leveraged buyouts during the heyday of the gung-ho Mergers and Acquisitions Era (although I suspect it would be hard to argue for any meaningful relationship between what he's taken out of the economy and what he has contributed to it), but the impact that rising economic inequality has on the economy as a whole. The fact that the economy does better -- is more stable and creates greater general prosperity -- during times of tempered economic inequality should come as no surprise. Producers need consumers, and when the vast majority of consumers are economically squeezed, consumption falls, the multiplier effect kicks in, and most folks (except perhaps for the M&A) folks are worse off. A society that dismantles its middle class is one that undermines its own economy. So the core issue about Mitt's taxes do not have to do with how much more money he's got than the rest of us, but about how the gaping inequality that goes with the regressive taxation system from which he benefits contributes to economic instability and threatens economic recovery.

Sunday, January 15, 2012

Firing Line


Mitt Romney scares me a lot more than he used to -- perhaps because it's looking increasingly possible that he might mount a serious challenge to Obama if he can just manage to keep his mouth from undermining his clean-cut politician/businessman looks. His latest bluster about how much he loves firing people who provide him with services deserves a lot more scrutiny than it has received -- and of a different kind. Set aside for a moment the irony of Romney getting bent out of shape because he's being taken out of context -- and forget for a moment his own campaign's deliberate and disingenuous use of out-of-context quotes by Obama.

Consider what this quote means about Romney's misunderstanding of how competition works in the field of health care insurance. In economic terms, health care is not a service like, say, a barbershop or an automotive mechanic -- in which the payment made by the consumer directly reflects the cost of the final service received. You pay health insurance, in the end, to receive medical care -- and, when you really need it, you end up paying much less than the actual cost of care. Otherwise, of course, you wouldn't buy health insurance.

It's possible for you to receive the care, and for the insurance company to make money, because insurance is based on risk sharing. That is to say, the economic transaction does not just involve you and the end-service provider. It also involves a company that distributes the risk across some portion of the population -- the larger the better, all other things constant. Because health insurance is based on risk-sharing there is an entirely different way of competing (than by providing a desirable service at a competitive price): companies seek to outdo one another in excluding people who really need health care.

In a world of unregulated free-market health care competition (unlike a world of free-market competition for, say, automotive oil changes), more providers does not necessarily mean a better choice of services. What it most likely means is that companies will find increasingly sophisticated ways of competing by refusing to provide services to those who have the greatest need of health care. That means using sophisticated techniques for screening customers before providing them with health insurance, and tangled legal loopholes that allow insurers to deny coverage to those who need it the most.

We've seen the free market for health care insurance in action in the United States and it's not pretty: the rational, economic goal of companies is to refuse to offer customers health insurance if there is any indication they might really need it. Even if the coverage is offered, the goal is to attempt to deny benefits if there is any way to do so.

This is not consumers "firing" the people who provide them with services -- it's wealthy corporations devising increasingly powerful ways to "fire" those clients whose health care needs prove too costly. Does Mitt Romney really believe that an insurance system based on risk-sharing across the population functions the same way as a fingernail salon? Is that what they teach at Harvard Business School. This conflation looks like the result of either ignorance or cruelty -- and either way it's frightening in a figure who might become the next US President.