Solving U.S. health care woes: a nonpartisan approach

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Earlier this month, Sens. Bernie Sanders and Ted Cruz engaged in a televised debate over the state of health care in the United States. While both politicians agreed with the assessment that health care as it stands now requires great reform, their solutions, not unexpectedly, fell along party lines. Americans were offered two, predictably partisan, options: Sanders called for more government involvement, while Cruz suggested cutting regulations as the key to reducing the burden of the costly system now in place. Implementing lasting reform in our broken health care system, however, will require a different approach—one guided by proper incentives and economic evidence rather than restrained by ideology.  

Both sides of the debate took an important first step when Sanders and Cruz rightly noted the shortcomings of the current system. Health care costs make up 17.1% of U.S. GDP, the highest in the world by a significant margin. Health outcomes, unfortunately, do not reflect this reality. Average life expectancy in the U.S. is only 78.7 years, ranking 26th relative to other countries in the world. Effectively, the United States is paying more for health care that does not deliver any significant improvement in health indicators. Americans are rightfully unhappy about this situation, but significant strides can be made to solve this problem in a manner that is largely nonpolitical.

In fact, many of the problems Sanders and Cruz recognized with the current system have solutions that do not fall squarely into any political ideology. Proposals like mandatory health savings accounts (HSAs) provide one instance of such policy fixes.

By ensuring citizens save money specifically for health care expenses, HSAs help eliminate financial roadblocks to health care access without limiting the ability of consumers to choose the health care provider and plan that best suits their needs. At the heart of nonpartisan improvements like this is the desired goal of a more effective, less expensive health care system, driven by the establishment of proper incentives guiding both corporations and consumers.

During the debate, for example, both politicians lamented the tragic results of unaffordable deductibles for patients with severe illnesses. However, ideologically polarized health care overhauls are not the only ways to solve this issue. One need only look at the structure of health care in a country like Singapore for a potential solution. On its face, Singapore’s policy to address the problem of unaffordable deductibles appears counterintuitive. Government funding for health care requires that no health service be provided for free.

In practice, this raises the cost of basic, day-to-day treatments like doctor visits for a mild illness, discouraging unnecessary use of medical care. This policy frees up medical resources to treat more life-threatening cases in a time-efficient and affordable manner.

Singapore also requires citizens to put money into tax-exempt health savings accounts in a program called Medisave, which has the result of discouraging spending on unnecessary medical procedures. The proper alignment of incentives for consumers in Singapore ensures that medical resources can be allocated to the most severe cases, rather than wasted on frivolous or overly expensive medical procedures.

The American health care system could also benefit from incentivising companies that provide medical services and insurance to cut unnecessary costs, without the need for heavy-handed government control. Again, the U.S. can look to the transparent system of Singapore, in which private health care providers are required to publish the prices of their policies.

By providing more information to consumers, this policy creates an environment that encourages health care providers to pursue more cost-effective policies without compromising health outcomes. This relatively light regulation of the industry can have outsized benefits, motivating cutbacks on expensive but ineffective medical procedures that contribute to the United States’ excessive spending on health care.

Another point of agreement between Sanders and Cruz was what they deemed to be the excessive costs of pharmaceuticals, a reality that prevents many Americans from receiving life-saving medicines. Sanders prescribed a greater use of the federal government’s market power as a large purchaser of drugs, while Cruz targeted excessive FDA regulation as the culprit behind high drug prices.

Rather than demonizing corporations as greedy evildoers or decrying safety regulations for drug approval as unnecessary, both parties should once again look to the establishment of proper incentives to craft policies that protect consumers without denying them affordable access to important drugs.

The Swiss system of approving pharmaceutical drugs provides one possible method to properly align incentives to benefit consumers, while still allowing companies to operate without excessive government control. In Switzerland, drug approval is contingent not only on meeting safety standards, but also on satisfying an objective calculation of cost-effectiveness for the new drug when eligible for reimbursement under health insurance plans. A system like this would discourage companies from creating overly expensive drugs, without requiring rigid price controls enacted by the government.

Out of current partisan stonewalling emerges a third, pragmatic path for health care reform in the United States: a focus on properly aligned incentives. Policies like the ones proposed here are driven not by ideology, but by economic evidence. Adopting these measures would be the first step toward the pursuit of a health care system that delivers better results at lower costs—an outcome that would be amenable to politicians and constituents across the political spectrum.

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Clean energy to carry on under a Trump Presidency

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On the campaign trail, President-elect Donald Trump promised to prioritize America’s energy needs by ending restrictions on coal companies. To many environmentalists, there is an implicit threat in this commitment to U.S. energy dominance: clean energy sources will face their demise as government interest in supporting the industry wanes. Furthermore, there is fear that a lack of U.S. commitment to clean energy will have a contagion effect on other nations, encouraging other countries to abandon climate agreements like COP21. On the face of it, a Trump presidency seems to herald doom for the future of clean energy.

In reality, the fate of clean energy will likely be far from catastrophic. Rapid improvements in technology for renewables like wind and solar mean that most of these products will be cost competitive with traditional fuel sources by 2025 without subsidies, while solar and wind can already compete in some geographic areas. A pro-coal president is thus unlikely to be the killing blow for the clean energy industry. Alternative energy sources like solar and wind will continue to improve and eventually replace outdated, environmentally damaging energy sources. Concern should instead center around the environmental damage that will occur in industries like coal until such a substitution occurs.

The ongoing maturation of alternative energy has ensured it will be a mainstay in the global economy in the future. While still expanding, the clean energy industry has improved far beyond the first, inefficient attempts at harnessing fuel from environmentally friendly sources. The future profitability of this industry as a large-scale energy provider is under little doubt, especially as many renewable energy sectors have matured sufficiently to near-price competitiveness with “dirtier” energy sources.

In most cases, clean energy firms no longer face an uncertain future about their viability in a competitive energy market. As a result, these firms will not suffer the chronic underinvestment that plagues infant industries, making it probable that private investment will fill the void left by a reduction in subsidies. This benefit is especially likely for firms that have moved from research to development stages for their clean energy products, as the commercial viability of such products becomes more apparent and thus appealing to private investors.

Even if the increased quantity of private investment does not entirely replace the funds provided by subsidies, clean energy industries may still benefit from the improved innovative efficiency of private investment. While subsidies add to the total quantity of innovative expenditures made by receiving firms, innovative efficiency has been found to suffer with government subsidies in many cases. More efficient allocation of investment capital would spur improved innovation rates, further making up for any loss in public investment. This results in part from the greater flexibility of private investment, which is better able to keep up with changing market conditions like the entry of new firms compared to more cumbersome public subsidies.

Globally, clean energy will also likely maintain its potential as a replacement for dirtier energy sources, regardless of the direction American energy policy takes. The U.S. currently constitutes a significant share of global energy consumption (18% in 2013), but other large, developing nations like China and India are increasing their shares of energy consumption as they expand their economies. While many expect these countries to do so through dirty energy sources, the reality is that developing nations already make up over half of all renewable energy investment globally. These countries do so because it is the cheaper option, due in part to the lack of fossil fuel infrastructure already in place.

As these nations continue to expand their energy infrastructure in the coming years, demand for renewables and other clean fuel sources will only increase, ensuring a bright future for the clean energy industry outside the U.S.

All of these factors will ensure the clean energy industry’s continued rise toward becoming the primary producers of fuel in the world. The environmental implications of a Trump presidency are not entirely positive, though. Proposed cuts in regulation of the coal industry that would accompany a reduction in subsidies for cleaner sources will result in greater production of environmentally harmful energy as the coal-producing firms would no longer pay for their pollution costs. Thus, there remains valid concern over environmental damage as a result of Donald Trump’s policies for the coal industry. These fears, however, are far more limited in scope and severity so long as clean energy continues along its path of innovation and expansion throughout the world.

 

Beyond Populism: The Importance of Punishing White-Collar Crime

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Late last month, The Economist published an article, “Jail bait,” arguing that the increased pursuit of criminal charges against white-collar workers is merely a symptom of America’s populist desire to vilify the wealthy. The article further asserts that not only is charging individuals costlier than charging firms, but also that individuals should not be held liable for their actions due to a system that promotes white-collar crime. Finally, the article claims that heightened enforcement can prove detrimental to innovators like Uber and Steve Jobs, who often walk the line of legality and morality when creating new businesses in the face of outdated regulations.

These arguments fail to acknowledge the potential benefits stemming from the punishment of white-collar criminals. Through stronger enforcement, both consumers and businesses can gain from an economy in which individuals are held accountable for breaking laws. Improved consumer trust in sellers of financial products is more conducive to economic well-being than allowing white-collar workers to skirt laws without consequences.

Calls for the increased punishment of white-collar criminals should not be mischaracterized as seeking “punishment simply because they are rich and successful.” In fact, criminal punishment actually holds the potential to improve the economic well-being of white-collar workers. This results from greater trust and transparency in white-collar industries, as consumers believe that rules and regulations are being adequately enforced to ensure fair dealings. Consumers are willing to pay a premium for products they trust, increasing both the quantity they demand and the price they are willing to pay due to the obvious benefit of knowing that they will not be victims of fraud or other crimes.

Contrary to what the article suggests, the economy may in fact benefit from the increased enforcement of white-collar crime, as taxpayers would face lower costs. While the actual costs of enforcement would likely be higher due to the greater number of cases brought against individuals, deterrence should also be weighed in the decision of which method to employ. In my last article, I referenced a study from Cindy R. Alexander showing that criminal charges can be a stronger deterrent to illegal behavior than fines. As a result, the savings from avoiding the damaging impact that white-collar criminals can have on the economy may offset the greater costs of pursuing these punishments in court. For example, the recent financial crisis – due in part to misleading information on the riskiness of mortgage-backed securities – greatly hurt consumer demand and hampered economic growth for years to come. Therefore, deterring future white-collar crime and its potentially damaging economic consequences should be factored in when assessing the true costs of enforcement.

It is also a dubious claim that punishing white-collar criminals would deter innovators driven to violate obsolete regulations. Though it may be true that entrepreneurs like Steve Jobs and Bill Gates engaged in activities that brought them into conflict with enforcement agencies, this does not prove that these actions were necessary to the success of their societally beneficial companies. In fact, these anecdotes do not provide any causal evidence that punishing white-collar crime will stifle the innovations of the entrepreneurial process. It is reasonable to call for changing regulations when they are outdated and inhibit innovation, but this should be decided through proper legal channels.

Nor can the blame be shifted entirely to a corporate culture or business environment that promotes wrongdoing. Fiduciary duties hold corporate managers accountable to the best interests of shareholders and to the laws regulating the operations of their businesses. Thus, unlike the article suggests, corporate managers, not just firms, would be liable when in violation of these duties. To fail to punish white-collar criminals in these instances would enable those individuals to escape accountability to their fiduciary duties.

By reducing the trend of increased punishment for white-collar crime to a bitter, populist movement, The Economist’s article fails to acknowledge the potential benefits of such a policy. Ultimately, more studies should be conducted to analyze the impact of increased enforcement on rates of innovation to determine whether there is a causal link. Even if an impact is found, though, it merely suggests a need to update regulations with greater speed to account for changing economic conditions. To realize the potential economic gains from greater trust in financial firms, punishments for white-collar criminals must be adequately enforced. Such an effort extends beyond populism in its intent to improve the economic well-being of all parties, consumers and businesses alike.

“Trumped-Up Trickle-Down” and What It Means

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In the first general election presidential debate, Republican nominee Donald Trump proposed one of his only concrete policies as a candidate: to cut taxes across the board, including a reduction in the corporate income tax rate from 35 percent to 15 percent. Democratic nominee Hillary Clinton called it “Trumped-up trickle-down,” alluding to Ronald Reagan’s so-called trickle-down economic policies of the 1980s. According to economist Heinz Arndt, the expression “trickle-down” implies a vertical flow from rich to poor that happens of its own accord. Tax cuts for higher-income individuals are meant to boost economic growth, as those individuals invest and spend the money saved on taxes. The corresponding increase in capital will create a need for more jobs, as higher investment means higher demand for goods and, eventually, an increase in wages. The same principle holds for giving tax cuts to corporations. If a corporation’s taxes are cut, the idea is it will use that money to either hire more workers or pay current workers more. In essence, the well-endowed will have more wealth to “trickle down” to lower economic classes.

In theory, it’s not a bad policy; in practice, it hasn’t worked. In the 1980s, Reagan proposed huge tax cuts across the board, especially for the highest-earners. The outcome of this policy was that the U.S. national debt roughly tripled during Reagan’s term, and income growth shifted from the bottom classes to the top classes. As you can see from the graph below, the Reagan tax cuts boosted income growth for the top 10 percent of income earners, while the bottom 90 percent of earners saw their income growth decline after the 1980s. This means that the highest earners earned even more, while income growth for the lowest earners slowed and eventually declined. Under Trump’s proposed tax cuts, this process is likely to repeat itself, widening the wealth and income gaps even more.

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According to a study by the Tax Justice Network, money that the wealthy accumulate through tax cuts is more likely to be moved to an offshore bank account than reinvested in the national economy. Corporate tax cuts may be used to give top executives bonuses or to fund the relocation of businesses to developing nations. While divesting from the American economy has the potential to make goods cheaper, the second plank of Trump’s proposed fiscal policy – extreme protectionism – would make his trickle-down tax cuts even worse.

Trump seeks to impose a 45 percent tariff on all imported products from China to the United States, meaning that any product coming from China will be marked up an extra 45 percent. Trump’s intention is to discourage companies from moving their factories to China, and instead open or maintain their factories in America. Except trade is incredibly beneficial to both countries involved. Trade allows countries that have a comparative advantage (meaning it is cheaper to produce one good compared to another in that country) to specialize at what they are best, whether it be abundant natural resources or a highly skilled labor force. Comparative advantage is why Southeast Asia produces most of America’s clothing and America produces most of the world’s high-tech products.

The reason we import products from China is that it is cheaper to import them than to produce them domestically. China’s comparative advantage in certain industries means that they can hire more workers and pay them less, making the final goods cheaper for American consumers. Imposing a tariff on all goods from China would effectively raise domestic prices, which would defeat the purpose of lowering taxes. For example, nearly 50 percent of U.S. imports from China are machinery and electronics, meaning a 45 percent tariff would make a large portion of consumer goods more expensive. Without an increase in wages, this increase in the price level would diminish the purchasing power of everyday Americans.

Overall, Donald Trump’s fiscal policy is comprised of two objectives that will do more to harm the economy in the long run than help it. It won’t create jobs, and it won’t raise wages. It will also make the rich richer and the poor poorer, enlarging the already vast wealth gap. Overall, Mr. Trump’s policies will benefit Mr. Trump personally more than they will benefit any average American who is so gladly voting for him. “Trumped-up trickle-down” economics is exactly what it says: a trickle-down policy on steroids.

Everbooked and Dynamic Pricing in the Share Economy

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We live in an era of sharing. Technological developments and online platforms allow people today to network and earn extra income by sharing assets they already have – their cars (Uber and Lyft), their household goods (Snapgoods), and even their homes and apartments (Airbnb, VRBO, and HomeAway). Collectively, this activity is known as the “share economy,” and it is rapidly growing. Participating in the share economy is simple: go online, or open an app, and in minutes you can find a ride or a place to stay for the weekend.

Founded in 2008, Airbnb allows users to rent a place to stay overnight in a private home or apartment. Having personally used Airbnb, I can attest to the benefits of renting a private place while on vacation it’s often less expensive than a hotel, there are more options to choose from, and staying in a private place has a “local feel.” As Airbnb advertises, “Don’t go there. Live there.” This online platform has proven very popular: Airbnb today is worth around $24 billion and has helped over 40 million people find a place to stay. As Airbnb’s rapid growth both in the United States and abroad continues, Airbnb landlords are taking advantage of data science in order to raise more revenue and secure a greater number of bookings. Recently, I had the opportunity to speak with David Ordal, the CEO of a Bay-Area startup known as Everbooked that assists Airbnb landlords with market analytics and a technique known as dynamic pricing.

Dynamic pricing involves continually adjusting prices to adapt to changes in demand that are detected through data analysis. American Airlines is credited with being the first company to adopt this technique; in the early 1980s, it began experimenting with “Super Saver” ticket prices that were adjusted based upon seat availability, demand, and how far in advance customers made reservations. The results were impressive – American Airlines’ revenues skyrocketed the next year. Dynamic pricing is now universal in the airline industry, and the hotel industry has used dynamic pricing for a long time as well. Ordal founded Everbooked in 2014 when he noticed that dynamic pricing was not widely used in the vacation rental industry. He saw an opportunity in bringing dynamic pricing and data analytics to landlords renting through Airbnb. “We do the same thing as airlines, but for a place to stay,” Ordal explained. Today, Everbooked operates in 3,322 cities across the United States and looks to expand internationally in the future.

Everbooked uses an algorithm to scan through market data in real time, searching for changes in various demand factors. “We look at different factors for demand, such as seasonal trends and weekend and weekday tracks,” Ordal said. He noted that, in some cases, weekdays actually see higher demand than weekends, often due to business travelers. In addition, the algorithm tracks Airbnb reservations in a given area and even examines local FAA air traffic data, which has proven to be a good metric for predicting how many people are traveling to and from a particular locale. When the algorithm detects something notable, it automatically updates users’ prices within hours of detection. The end result is that, by having their prices updated in real time, Airbnb landlords can earn an extra 14-38 percent in revenue each year.

“A lot of clients are professional landlords,” Ordal added. “We work with hosts who are more business-oriented. These are the people who really want to understand the market, who really want to understand analytics.” In addition to automatically updating clients’ prices, Everbooked also compiles huge amounts of data on rental units in various locales across the United States, allowing clients to compare their listings to those of other nearby Airbnb landlords. On the Everbooked website, an Airbnb landlord can see what types of listings they are competing against – whether homes, apartments, or condominiums – and the average prices for each of these types of listings throughout the year. Several histograms display which prices are the most common among various types of listings, as well as which types of listings are the most popular in a given locale. Everbooked also creates graphs to help clients determine the prices they should charge for extra guests, and provides up-to-date information on seasonal demand trends.

At one time, the benefits of dynamic pricing were limited to large, highly organized businesses. Today, with the rise of the share economy, that landscape is dramatically changing. Ordal thinks that someday dynamic pricing will become universal among vacation rentals. I agree – there are simply too many benefits to pass up.

Financial Crimes and Fines: A Misguided Approach

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In the wake of the Great Recession, populist opinion has responded approvingly to regulatory agencies’ stronger approach against wrongdoing by financial firms. Companies in the financial industry have increasingly found themselves subjected to fines as a result of this greater scrutiny. Yet, regulatory agencies are losing out on a superior alternative to fines. Criminal charges against individuals, including executive-level managers, should be employed as a more effective, targeted punishment that does not harm innocent employees and increase systemic risk in the process.

The U.S. Department of Justice’s recent charges against Deutsche Bank provide one example of the possible downsides of using fines as punishment. In September, the DOJ proposed a $14 billion fine against Deutsche Bank for selling mortgage-backed securities during the financial crisis without proper disclosure. The possibility of such a large fine sparked doubts in investors’ minds about the firm’s ability to pay, leading to a further decline in the already troubled firm’s share price. Fear of the ramifications of the fine was not limited solely to Deutsche Bank’s investors, either. Other financial firms became nervous at the precedent that the DOJ could set with this large fine. Some analysts were worried about the systemic risk Deutsche Bank could pose to the highly interconnected banking industry, should the fine significantly damage Deutsche Bank’s liquidity and endanger its ability to do business.

One of the main benefits of the use of criminal charges rather than general fines is that it allows regulatory agencies to avoid increasing systemic risk. Fines against a firm can reduce its liquidity, and if the fine is large enough, this reduction in liquidity could cost the firm more than the face value of the fine. In response to a liquidity shortage, the firm may have to engage in fire sales of assets, accepting lower prices to sell them quickly and damaging the value of similar assets held by other firms. Or, to fulfill regulatory capital ratios, the firm may have to issue additional equity, diluting current shareholder value. Thus, if enforcement agencies wish to avoid collateral damage to firms not implicated in a criminal investigation, then there is necessarily an upper limit as to how much they can fine guilty firms.

Criminal charges, on the other hand, hold the potential to lessen systemic risk by avoiding the more immediate losses in liquidity resulting from fines. Thus, criminal charges can limit harm to outside parties, as the replacement of even high-level executives is less likely to be as damaging to a firm as punitive fines. Furthermore, criminal punishments can be more effective deterrents to illegal behavior. In an analysis of data from 78 firms punished for financial crimes, Cindy R. Alexander finds that the “reputational penalties” firms pay are greater with criminal, rather than civil, sanctions. These reputational penalties, which take the form of lost customers or lower prices accepted by remaining customers, damage the punished firm’s profitability over time but avoid the larger, short-run costs that fines create.

However, there are some downsides to the greater use of criminal charges against firms. Alexander found that firms attempting to recover from reputational damage may shuffle employees and managers to regain reputation. This shuffling may be indiscriminate, resulting in employees not involved in criminal wrongdoing to lose their jobs. The deterrent effect of criminal charges, though, may counter this risk by discouraging firms from engaging in wrongdoing in the first place.

Historically, the use of criminal charges in response to financial firms’ misdeeds has been used sparingly by the DOJ and other enforcement agencies, especially against upper-level managers. Many were outraged when firms bailed out by the U.S. government during the financial crisis kept their executives without facing criminal charges. Regulatory authorities have, however, brought criminal charges against high-level traders in recent years. In July, the DOJ announced that it would charge two HSBC trading executives for manipulating currency prices. When firms are guilty of significant wrongdoing, as in the case of Deutsche Bank, enforcement agencies should ensure that senior executives face the same criminal charges that lower-level employees would face for their crimes, including possible jail time.

While many are happy to see regulatory agencies adopt a hardline approach with large fines like the one proposed against Deutsche Bank, such a method has unintended consequences that extend beyond just the guilty parties. On the contrary, the use of criminal charges against individuals, including high-level executives, offers an effective alternative that avoids many of the negative externalities created by fines. In a global economy that is increasingly interconnected, it is important that regulatory agencies punish wrongdoing with strong deterrents like criminal charges that do not cause wider economic harm.