• The ACA, Ted Cruz’s taxes, and two views of fairness

    There are young people who will pay more for insurance as a result of the ACA. Cathy Reisenwitz thinks this is unfair:

    The problem with [the ACA] is that it hoses young, relatively poor people like me right when we least need high bills for services they’re not using. And it helps older, relatively rich people who should be able to afford the care they need. If America’s downtrodden and struggling young people are smart, they’ll opt out.

    She thinks it’s unfair because young people entering the job market earn less than older people and they also have lower health care expenses, so they are subsidizing the health care of older rich people.

    Reisenwitz has mischaracterized who receives the ACA transfer. But first, let’s note that there is a program that transfers her money to the elderly. It’s called Medicare. Medicare is funded through Reisenwitz’s taxes now, but it will not benefit her for decades. It seems odd that she does not mention it in her post.

    However, it would be misleading to call Medicare a transfer from the young to the elderly rich, because many beneficiaries are either poor or would be impoverished by their health care expenses, but for the Medicare program. Before Medicare, the elderly were by far the most impoverished group in America (US Census data).

    HistoricalPoverty2

    After Medicare, elder poverty dropped swiftly, while poverty among those 18-64 and among children has slowly climbed. Reisenwitz could plausibly argue that Medicare and Social Security have transferred too much to the elderly, or that these programs should be means tested. But such criticisms should be balanced by acknowledgement of how much Medicare has improved the lives of the elderly.

    There is another ‘program’ that also transfers Reisenwitz’s funds to well-off older people. From her internet profiles, she appears to be a freelance writer. If so, she is paying for health insurance (if she has it) using dollars that have already been taxed. Many well-off older people, however, receive health insurance as a benefit from their employer. The value of that benefit is not taxed as it would be if the employee received it in wages or salary. (The ACA’s ‘Cadillac tax’ on high end health plans, is in part an attempt to address this inequity.) So Reisenwitz contributes to a tax subsidy for people who are often a lot wealthier than she is. One of the people she subsidizes is Senator Ted Cruz, spouse of a Goldman Sachs partner.

    The ACA, however, doesn’t transfer resources to the elderly rich. The ACA transfers resources to people who are uninsured, many of whom are low income or have pre-existing medical conditions that excluded them from the private insurance market. As Josh Barro explains, this is why health insurance will now cost more for some young people.

    It’s a lot cheaper to provide health insurance coverage if you exclude a lot of the people who need it most. Making insurance available to people with pre-existing health conditions costs money. Obamacare funds this transfer to the chronically ill in part by raising premiums on healthy people… The question is “is it better than the old system, where huge subsidies go to people with no need for them and tens of millions are left uninsured?” That answer, if you consider the costs and benefits honestly, is yes.

    Barro has sharp words for conservative pundits:

    For the last few weeks, I have seen a vast outpouring of conservative sympathy for young, healthy, prosperous people whose health plan premiums are going up. These poor, poor things. How could Barack Obama do this to them? …But what about the tens of millions of Americans who currently lack health insurance and are about to get access to available, affordable coverage? Where is the conservative sympathy for people who would be worse off if the law doesn’t go forward?

    I think this is a powerful argument, but I doubt that it will sway many conservative critics of the ACA. Are they really concerned about the relative wellbeing of the young and old? My guess is that they object in principle to government transfers of any kind. (How conservative policies work in practice is for another post.) What’s unfair is the transfer itself, not the pattern of wellbeing that results from it.

    The ACA comes from a view of justice in which severe and prolonged differences in wellbeing between social groups do pose questions of fairness. On this view, some patterns of relative wellbeing can justify redistributive government transfers. If the ACA does half as well as Medicare, it’ll be worth these years of struggle.

    @Bill_Gardner

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    • I think conservatives are comfortable with persistent and severe differences in economic well being when they derive from market forces. They object when alterations in relative prosperity are imposed by the government. I suppose it comes down to whom does one trust less- the decentralized faceless market of millions of people acting in their own interests, or the centralized actions of a small number of politicians? The latter seems far more likely to be corrupt and to ignore the well being of all but a few in power, but the former is notoriously insensitive to what others might consider social equity.

      I don’t know how old Reisenwitz may be, but by “older” many younger people mean “40 and above”, which includes a lot of people who are far from eligible for Medicare.

      If the ACA did not require financial transfer from people like Reisenwitz to others, then there would be no concern about signing up lots of young invincibles. The transfers might be in part from healthy young invincibles to sick young invincibles. However, given the demographics of illness, it seems inescapable that much of the transfer will occur from healthy young people in their 20’s to unhealthy people who, although too young for Medicare, are well out of their 20’s.

      If it were a good deal for the young and healthy, you would not need a penalty to get them to sign up. If it were such a good deal, you could charge them an annual fee for the privilege of participating and paying a premium that was cheap compared to the coverage they would get. The mere fact that the designers thought they needed to to force young to participate is all the proof one needs that the architects of the ACA thought the coverage was a bad deal.

      • dbh,
        I like your first paragraph — it’s a clear and fair summary of the differences.

        With respect to your last two paragraphs… I’m not suggesting that the ACA is a ‘good deal’ for a young person this year. It may not be. The best I would argue is that over the course of their lives, living in a society where subsidized insurance was available even to the poor and there are no exclusions for pre-existing conditions is a good deal.

        And more important, a fair deal, where ‘fair’ is understood from a democratic-egalitarian perspective. Your view may differ. Because it is not necessarily optimal for the healthy young in the short term, there needs to be a penalty. From our point of view, this is just like the penalty for not paying your taxes to support other functions of government — the common good can’t be sustained without it.

        • “With respect to your last two paragraphs… I’m not suggesting that the ACA is a ‘good deal’ for a young person this year.”

          Then allow me to suggest that it is. By paying a bit more now, young people are guaranteed (assuming ACA isn’t repealed) that their insurance costs will rise no more than a factor of three in their lifetimes. (Assuming constant earnings for the sake of argument, and to compare apples to apples.)

          At 1/3 the cost as what a 64-year old sees, they see a far less nasty bite from their paycheck. In an alternative universe where everyone who pays taxes is automatically covered, costs stay the same throughout one’s career, and health care costs come from general revenues, which one contributes to the same all the time, of course. (This is roughly what happens to folks who don’t get insurance through work in Japan: health insurance premiums are a surcharge on your income tax (plus a regressive flat component).)

          What I’m saying is that one isn’t young forever (something I noticed when I turned 60, ROFL). And ACA means that someone young now will have affordable insurance for their whole lives. That’s enormous, and a fantastic deal compared to what they had before, namely guaranteed ever higher premiums due to getting hit by both aging and inflation, and the expectation that they’ll lose insurance as soon as they get sick.

    • 1. SS should not be means tested, that creates bad incentives, but clearly the higher earners should not get more than low earners everyone should receive the same amount in retirement.

      2 But such criticisms should be balanced by acknowledgement of how much Medicare has improved the lives of the elderly.

      That is impossible to quantify, further I think that most people would be shocked at how the benefit looks from all of this late in life care to most who study it.

      Would you have taxpayers pay for a treatment that would keep the average treated person alive 1 more day if it costs $1 million per treated person? I think not. How about 2 weeks or 2 months how about 2 months for $100,000. It gets very subjective doesn’t it? (Life expectancy in Costa Rica is close to what it is the USA with very little of what medicare buys.)

      3. There is another ‘program’ that also transfers Reisenwitz’s funds to well-off older people. From her internet profiles, she appears to be a freelance writer. If so, she is paying for health insurance (if she has it) using dollars that have already been taxed. Many well-off older people, however, receive health insurance as a benefit from their employer. The value of that benefit is not taxed as it would be if the employee received it in wages or salary. (The ACA’s ‘Cadillac tax’ on high end health plans, is in part an attempt to address this inequity.) So Reisenwitz contributes to a tax subsidy for people who are often a lot wealthier than she is. One of the people she subsidizes is Senator Ted Cruz, spouse of a Goldman Sachs partner.

      If you give everyone a tax break you give no one a tax break so it turns out that the tax break helps mostly providers. It also helps those with higher cost insurance for their income group but less so. It does make the tax code slightly less progressive but that is built into the decisions about how progressive to make taxes.

      4. One can point out bad things about the PPACA and care about the poor uninsured.

      5. The ACA comes from a view of justice in which severe and prolonged differences in wellbeing between social groups do pose questions of fairness. On this view, some patterns of relative wellbeing can justify redistributive government transfers. If the ACA does half as well as Medicare, it’ll be worth these years of struggle.

      The honest way to do that is to tax and distribute. The PPACA is complicated attempt to tax people without them knowing that they are being tax. That complication creates many problems and inequities as with SS (see my point 1).

      • F,

        1. I will pass on this one, not being a specialist in retirement benefit design.

        2. There are many many things that need to be fixed about Medicare (and some important things to be fixed about Social Security). My point is that compared to the status quo ante of no Medicare, the program appears to have accomplished enormous good.

        3. I’m not sure I follow your point. The employee benefit tax exclusion is not something that everyone enjoys.

        4. Of course.

        5. Maybe, that would be better, but it’s not obvious why. I don’t know why say “honest” here.

    • “My guess is that they object in principle to government transfers of any kind.”

      Not really a guess – the howls about the ACA are a matter of principle for them. That’s it’s about health is secondary but the hypocrisy about the tax breaks the well-off get is breathtaking.

      In the UK there used to be a movement called ‘compassionate conservatism’ but both in the UK and the US that seems to be have been abandoned. In England, the Tory-led coalition is going in hard on people with disabilities at present.

      An underlying factor, I believe, is a hyperactive need to distance themselves from the recession by blaming the poor and vulnerable. Picking on health and disability is simply vile.

    • Great argument OP! I think it could be used to justify food insurance, booze insurance and sex insurance.

      The cool thing about those, as opposed to Medicare, Medicaid and Obamacare, is that you could easily get the benefits overseas, which you can’t get from Medicare Part A, Part B, Part C, Part D, or any part of Obamacare or Medicaid. That sad fact doesn’t relieve you of paying lifelong for those extravagant wealth-transfer programs.

    • Bill,

      I was responding to “Reisenwitz has mischaracterized who receives the ACA transfer.” and noting that some of her premiums will be expected to be transferred to older people who have more money that she does. So I don’t think she is that wrong about the transfers.

      Is it a “fair” deal? I suppose that depends on your opinions both about the legitimate role of government in redistribution, and whether you approve of the specific winners and losers in this particular plan. Reisenwitz complains that her income is too low for her to be a loser.

      “From our point of view, this is just like the penalty for not paying your taxes to support other functions of government — the common good can’t be sustained without it.”

      Well, this particular government program cannot be sustained without the contributions from a lot of people like Reisenwitz. But to assume that this is the route to the common good, and a function of government begs the questions.

      If the ACA were to work, and there are more reasons everyday to suspect it will not, then it would make health insurance available to many people, lower prices for some, while pricing others out of the market. One’s opinion on whether this is “fair” depends on whether you are a winner- getting more coverage at lower cost, and with subsidies- or a loser who is paying for the subsidies, and perhaps no longer able to afford insurance for yourself.

      It does seem a bit of a reach to look at the poorly defined sweep of winners and losers and declare the system “fair”.

      • dbh,
        I hope this helps. There are at least two kinds of objections to the ACA.

        1. The program is poorly designed and poorly implemented, to the point that it will do more harm than good.

        2. Redistributive transfers from one group to another are wrong.

        I was arguing against #2, which I disagree with as a matter of principle. I’m reading you as advocating #1. This criticism rests on facts about the harms and benefits of the program, not principle. And it may well prove that you are right on the facts. I think it is too early to know.

    • “The ACA, however, doesn’t transfer resources to the elderly rich. The ACA transfers resources to people who are uninsured, many of whom are low income or have pre-existing medical conditions that excluded them from the private insurance market. ”

      Not true.

      Sorry, but capping premiums for the old at 3X what a young person with the same coverage will pay means that premiums for young people are artificially high, and premiums for old people are artificially low.

      The thresholds for subsidies are low enough that young people who do not make much money will be forced to subsidize coverage for old people who have more than enough money to cover their own costs.

      As far as the transfers are concerned, you can approve of transfers from the rich to the poor in general and still object to a poorly conceived and massively inefficient transfer scheme that unnecessarily moves money from the young to the old on the basis of age alone, rather than any demonstrable need.

      It would have been vastly more just an efficient to use general revenues to directly subsidize the premiums for those who are too poor to pay for their own premiums, and pay outright for the care required by the truly uninsurable.

    • This discussion is very frustrating. Let’s be clear. The ACA is merely changing the redistributions in our kludge of a healthcare system. Such redistributions include:

      1: people without insurance to bargain for discounts (generally the poorer and uninsured) subsidize people with discounts.

      2: Healthy people with group insurance subsidize the sick people in their group. Younger people with group insurance that covers preventative subsidize the colonoscopies and so on of the older

      3: Taxpayers subsidize Medicare, Medicaid and VA users

      4: Everyone who uses healthcare subsidizes the people who need hospital care and can’t pay for it.

      5: The tax system heavily subsidizes company-issued group insurance.

      So, it’s really tiresome to hear people talk about whether or not the ACA is “fair” without talking about whether or not the existing system is “fair”.

      Is it fair that Ted Cruz’s health insurance gets a massive tax break and some struggling self-employed guy gets none? Does that encourage or
      discourage small business formation and economic growth? Does it reflect a “free market”?

    • The basic flaw in Reisenwitz’s statement is that people, even young people, need insurance. Young people do get expensive illnesses or develop chronic conditions.

      Just because your house didn’t burn down doesn’t mean that you wasted your money insuring it. To imply that’s the case is to misunderstand the basic point of insurance.

    • “The ACA comes from a view of justice in which severe and prolonged differences in wellbeing between social groups do pose questions of fairness. On this view, some patterns of relative wellbeing can justify redistributive government transfers.”

      Bill:

      Serious question: how do you think about patterns of relative well-being that persist across national borders, and how would you respond to someone who argued that the pattern of disparities that persist between the average citizen in say, Canada and the rest of the developing world pose questions of fairness sufficient to warrant far greater transfers from Canadians to residents of poor countries who are suffering as a consequence of these disparities?

      Is something that you support in principle, but can’t support in practice simply because we currently lack a politically feasible mechanism for determining the appropriate magnitude and allocation of such transfers?

      • JayB,
        That is a very serious question — thanks for posing it.

        There are Peter Singer’s arguments on this point (http://www.thelifeyoucansave.org/). On his view, a child dying of a preventable illness in, say, the Congo, is just like a child drowning in the pond near my house in Nova Scotia. If I’m walking by the pond, it’s my obligation to dive in and save the child and I have just the same obligation to save the Congolese child.

        Other ethicists argue that being partial to those with whom we have a relationship can be ethically justified. Thus, for example, it is my responsibility to care adequately for my own children before I care for other children, perhaps even if those children are much needier. Similarly, I should care for my Nova Scotian neighbours before I care for Albertans, and for Canadians before I care for Congolese. This partiality is essential to sustain the bonds of family, neighborhood, and country.

        I haven’t read deeply in this area, but I think that some amount of partiality toward our neighbours is appropriate. I give money to Médecins sans Frontières (http://www.msf.ca/) and I should give more.

        There are, of course, many arguments about whether the current foreign aid regimes actually deliver benefit (eg Angus Deaton’s new book).

        • @ Bill:

          I appreciate your reply, but if you’ll allow, I’d like to push the question a bit further.

          There are certainly a great deal of practical and philosophical reasons to constrain redistribution within a given area. Adam Smith reasoned through the very same dilemma in his “Theory of Moral Sentiments,” which I wish more folks who profess to understand Smith would take the time to read, and which I’ll link to the specific passage in which he does so below.

          Anyhow -even if we assume that redistributive justice works best when those from whom resources are taken have some kind of tangible connection to the people are receiving them, the problem of magnitudes and distribution are still with us. You may have a higher standard of living than your neighbor or the family down the block that persists despite the redistributive mechanisms that are already in force, and it may be large enough to inflict all of the material and psychological harms on the said family that inequality writ large is presumed to have on society as a whole. Once could reasonably stretch the chain of causality back far enough to demonstrate that you are no more responsible for your elevated position relative to them than they are for their diminished circumstances relative to you.

          Now lets suppose that a democratic body which had been convened to mitigate the effects of such inequalites announced that the disparity in income and status between your two households is imposing an intolerable set of externalities on society, and issues a decree which compels you to transfer sufficient assets and future earnings to the less fortunate family in order to insure that that the existing gap between your income and assets never exceeds more than half its current value. Would you object? How would you do so within the parameters of the conception of redistributive justice which you personally subscribe to and which you have argued, in the post above, that the government ought to enforce?

          This isn’t intended as a “gotcha” question. By asking it I’m hoping to learn more about how you conceive of the proper boundaries, magnitudes, dimensions, and mechanisms of redistributive justice.

          *http://www.econlib.org/library/Smith/smMS3.html

          Scroll down to section III.I.46, or look for the passage that starts with the following….

          “Let us suppose that the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake, and let us consider how a man of humanity in Europe, who had no sort of connexion with that part of the world, would be affected upon receiving intelligence of this dreadful calamity. He would, I imagine, first of all, express very strongly his sorrow for the misfortune of that unhappy people, he would make many melancholy reflections upon the precariousness of human life, and the vanity of all the labours of man, which could thus be annihilated in a moment….”

          • JayB,
            Very well put and I agree that the problem of magnitudes, as you put it, is important.

            I am an egalitarian, but only to a limited degree. There will be variation in economic outcomes, in many ways it is a good thing. My view — which I am struggling to spell out elsewhere — is that everyone should have a sufficient minimum of resources and human capabilities such that they can stand with dignity as an equal in a democratic community. I don’t think American society delivers that today. Nor does Canada, though it does a better job.

            I am most interested in services to children and families as a way to achieve that. But some redistribution also matters. So this gets us to your spot on question about magnitudes. How much redistribution? I doubt there is a theory that would allow us to calculate the magnitudes. We have to work them out through democratic process.

            • Fair enough – but I think that there are many well-meaning folks to the left of you who would characterize the position you just laid out in very un-charitable terms. Having said that, I think that your comments make clear that even amongst the most ardent progressives there can be significant disagreements on the practical implementation of redistributive policies even amongst people who generally agree in principle. E.g it *is* possible to argue against, or for limitations on redistributive policies for reasons other than naked selfishness, a visceral hatred for the less fortunate, etc.

              Feel free to edit out this long passage from Smith on this point, but I particularly enjoyed this passage that touches on the themes that we’ve been discussing here.

              “Two different sets of philosophers have attempted to teach us this hardest of all the lessons of morality. One set have laboured to increase our sensibility to the interests of others; another, to diminish that to our own. The first would have us feel for others as we naturally feel for ourselves. The second would have us feel for ourselves as we naturally feel for others. Both, perhaps, have carried their doctrines a good deal beyond the just standard of nature and propriety.
              III.I.51

              The first are those whining and melancholy moralists, who are perpetually reproaching us with our happiness, while so many of our brethren are in misery, who regard as impious the natural joy of prosperity, which does not think of the many wretches that are at every instant labouring under all sorts of calamities, in the languor of poverty, in the agony of disease, in the horrors of death, under the insults and oppression of their enemies. Commiseration for those miseries which we never saw, which we never heard of, but which we may be assured are at all times infesting such numbers of our fellow-creatures, ought, they think, to damp the pleasures of the fortunate, and to render a certain melancholy dejection habitual to all men. But first of all, this extreme sympathy with misfortunes which we know nothing about, seems altogether absurd and unreasonable. Take the whole earth at an average, for one man who suffers pain or misery, you will find twenty in prosperity and joy, or at least in tolerable circumstances. No reason, surely, can be assigned why we should rather weep with the one than rejoice with the twenty. This artificial commiseration, besides, is not only absurd, but seems altogether unattainable; and those who affect this character have commonly nothing but a certain affected and sentimental sadness, which, without reaching the heart, serves only to render the countenance and conversation impertinently dismal and disagreeable. And last of all, this disposition of mind, though it could be attained, would be perfectly useless, and could serve no other purpose than to render miserable the person who possessed it. Whatever interest we take in the fortune of those with whom we have no acquaintance or connexion, and who are placed altogether out of the sphere of our activity, can produce only anxiety to ourselves, without any manner of advantage to them. To what purpose should we trouble ourselves about the world in the moon? All men, even those at the greatest distance, are no doubt entitled to our good wishes, and our good wishes we naturally give them. But if, notwithstanding, they should be unfortunate, to give ourselves any anxiety upon that account, seems to be no part of our duty. That we should be but little interested, therefore, in the fortune of those whom we can neither serve nor hurt, and who are in every respect so very remote from us, seems wisely ordered by Nature; and if it were possible to alter in this respect the original constitution of our frame, we could yet gain nothing by the change. “

    • The reason we are even talking about the financial part is that our country’s wealth distribution is in the toilet. To wit: “The 400 wealthiest Americans are worth a record $2.02 trillion, roughly equivalent to the GDP of Russia.” FORBES That is right- 400 hundred people in America have as much wealth as the entire country of Russia puts out in one year. That is simply insane. If our monetary system was more equitable we would not be as concerned about the money part of all this. As it is, we are trying to divide crumbs for hundreds of millions while 400 get a whole pie. The divide is more than simply old vs young. It is the needs of a very, very, very few and millions.

      That can’t end well.

      • Spot on. If wealth were more equitable to start, we wouldn’t have such high premiums for insurance because more people would be able to pay more of their own way.

        But this is lost on the useful idiots who cheerlead the plutocracy despite benefiting from the protections of the safety net.

    • Your example on the freelance writer completely ignores the valuations on utility. Curious for a blog with economics in the title.