The Exchange Rate of a Util

Politics often oscillates between being a source of extreme optimism and being a source of tragic disillusionment. In my experience, it seems that many people in politics are used to such vicissitudes and are immune to the emotional effects that accompany them. I thought, that like them, I was capable of abstracting personal feelings from the polemics of the democratic process. Unfortunately, after working on behalf of a congressman at one of the most recent town hall meetings, I was woken from my political steeper and thrust into a whirlwind of so-called political passion. Staring blankly at unruly crowds screaming at a representative who was accorded no opportunity to answer questions that were posed by interested voters, I observed that this is what it means for the democratic process to be broken.

I do not care to expand upon the oft-stated opinion that those groups who attend town hall meetings with the sole intention of disrupting the meetings are working wholly and unquestionably against the democratic process; such opinions are so clear and agreeable that elaboration is unnecessary. The meeting itself and the fallout afterward, however, have made a couple additional points apparent: 1) There is a wealth of misinformation concerning health care reform; and 2) Those who are perpetuating such misinformation are in no way heroic and are in no way political martyrs; instead they are largely responsible for the breakdowns in the democratic process that are rife at town hall meetings nationwide.

The three most egregious myths about HR 3200 – the public-option health care bill – are the following:

Myth 1: The bill will allow illegal immigrants to get free coverage.

Section 246: “No Federal Payment for Undocumented Aliens. Nothing in this subtitle shall allow Federal payments for affordability credits on behalf of individuals who are not lawfully present in the United States.” As I am quoting the bill directly, there is no additional analysis needed.

Myth 2: The bill will pressure elderly citizens to end their lives prematurely.

Section 1233: “Provides coverage for consultation between enrollees and practitioners to discuss orders for life-sustaining treatment. Instructs CMS to modify ‘Medicare & You’ handbook to incorporate information on end-of-life planning resources and to incorporate measures on advance care planning into the physician’s quality reporting initiative.” The consultations are not mandatory and will only provide information requested by the patients. Again, I am merely quoting the bill directly.

Myth 3: Private insurance and employer-based coverage will cease to be offered.

Section 102: “Protecting the choice to keep current coverage: (a) Grandfathered Health Insurance Coverage Defined- Subject to the succeeding provisions of this section, for purposes of establishing acceptable coverage under this division, the term `grandfathered health insurance coverage’ means individual health insurance coverage that is offered and in force and effect before the first day of Y1 if the following conditions are met: (1) LIMITATION ON NEW ENROLLMENT- (A) IN GENERAL- Except as provided in this paragraph, the individual health insurance issuer offering such coverage does not enroll any individual in such coverage if the first effective date of coverage is on or after the first day of Y1. (B) DEPENDENT COVERAGE PERMITTED- Subparagraph (A) shall not affect the subsequent enrollment of a dependent of an individual who is covered as of such first day. (2) LIMITATION ON CHANGES IN TERMS OR CONDITIONS- Subject to paragraph (3) and except as required by law, the issuer does not change any of its terms or conditions, including benefits and cost-sharing, from those in effect as of the day before the first day of Y1. (3) RESTRICTIONS ON PREMIUM INCREASES- The issuer cannot vary the percentage increase in the premium for a risk group of enrollees in specific grandfathered health insurance coverage without changing the premium for all enrollees in the same risk group at the same rate, as specified by the Commissioner.” This is a lot to swallow, but I included the exact and complete text so that it can be referenced accurately. The above shows that, conditional on continuing to meet basic standards, largely those that exist already, existing private insurance and employer-based coverage will be permitted.

A discussion of the merits and costs of the bill is outside the scope of this article; in explaining the aforementioned myths I hoped only to demonstrate that there are commonly-held beliefs that directly contradict the text of the bill. It would undoubtedly be the case that a bill that ensures illegal immigrants using taxpayer dollars, promotes euthanasia, and strips individuals of existing coverage would be detrimental and inhumane; the reality is, however, that such a bill does not exist. In order to have a meaningful discourse concerning health care reform, we need to hold accountable those self-proclaimed entertainers and pundits who are actively espousing misinformation concerning the bill. If we are able to to so, then we might be able to once again hold town hall meetings that provide a forum for constituents and representatives to discuss the bill on the basis of bill’s terms and to modify the bill as to garner the support of the electorate.

The American Clean Energy and Security Act that passed in the House and is awaiting approval in the Senate would be a sweeping and revolutionary change in environmental policy unlike anything we have seen since the Clean Air Act was passed in 1963. The bill is so broad and comprehensive in its applications that it has rendered most debates about its merits incomplete and ineffective, as if the two sides pitted against each other have merely been two ships passing. To simplify, the bill attempts to implement four principle policies:

• A cap and trade program in which companies in the heavy industry and energy sectors would be required to own permits for carbon emissions. 85 percent of the permits would be free, and the remaining 15 percent of permits would be auctioned off in order to provide revenue needed to execute other measures in the bill.

• A number of plans designed to mitigate the economic costs of lowering carbon emissions, including cash transfers to poor households whose energy costs will rise and unemployment benefits to those who will lose their jobs in affected industries.

• Efficiency requirements and funding for research and development to improve energy efficiency.

• A renewable energy requirement that forces large electricity providers to produce 20 percent of their output from renewable energy sources.

The above measures are designed in part to lower carbon emissions 17 percent by 2020 and 80 percent by 2050. Additionally, the bill hopes to invest in more efficient energy systems and in renewable energy sources.

That all said, the bill is overwhelming, which is why messages from pundits seem largely inconclusive and incoherent. I hope to clarify the confusion about the implications of the bill with the following two principles:

• Though investing in energy innovation could lower energy costs and prove economically beneficial in the long-term future, cutting emissions given current energy capital is economically costly in the short run.

• If the costs of the bill, in terms of transition programs and investment initiatives, exceed the revenue provided by the bill, then the bill will either fail to complete the transition programs and investment initiatives or the programs will demand outside funding from the government.

What do I mean by the first principle? Lowering emissions by 17 percent will be costly to industries who are being asked to lower the emissions. The increased costs of lowering emissions in the short run will be reflected in higher costs for all products that are in some way related to heavy industry and energy, which happens to be all products one can buy. The costs are passed to all manufacturers, sellers, and consumers, to a greater or lesser degree depending on their respective supply and demand elasticities, and the economy takes a hit. The economic damage of lowering carbon emissions by 17 percent in the short run is wholly unavoidable, no matter what the mechanism is for doing so. Until more efficient energy sources and systems are developed, the amount carbon emissions are reduced will be directly related to the amount the economy suffers. In this sense, lowering carbon emissions in the short run is a trade off that poses the following question: Do we value the lowering of emissions enough to spend the amount that doing so requires?

And the second principle? The bill spends a lot on transition programs to ease the economic costs of lowering emissions in the short run. The programs, in addition to investing in renewable energy and in efficiency-improving systems comprise a price tag much greater than the revenue that will be earned from auctioning off 15 percent of the pollution permits. For example, 15 percent of the 15 percent raised would be used to provide cash transfers to poor households whose energy costs will likely increase by at least 10 percent. Though it sounds nice to provide such transfers, the numbers do not add up: Roughly 2/15 of the cost hike will be accounted for by the cash transfers, leaving 13/15 of the cost hike for poor households to pay. To fully mitigate the costs would require outside funding, either from the government or from third-party non-government organizations. Again, there is a clear trade off and another question is posed: Do we value the transition programs to ease the economic burden and the investment initiatives to improve efficiency and the availability of renewable energy sources enough to spend the amount doing so requires?

My point is neither to oppose nor support the bill; I hope only to illuminate the true costs associated with its plans. It would wrong to think the bill will be self sufficient since the costs of the bill are far greater than the revenues provided. Furthermore, though investment in energy efficiency may lower costs in the long run, reducing emissions in the short run is a trade off, as doing so is costly to all corners of the economy. In an effort to avoid taking sides as so many pundits have, I will pose the questions that will need to be answered by those considering the bill: Are we willing to spend the amount the bill demands? Can we do so in the current economic climate? And do the long-term environmental benefits and potentially long-term economic benefits justify the short-run expenses?

Michigan is sad. I hear about it everyday from the family and friends I have who still live there. “It’s a sad day for Michigan,” my mother says on nearly every phone message she leaves. “But the weather is nice today,” she concedes. Michigan is sad, and so is the country. We should not downplay the significance of GM’s apparently ineluctable chapter 11 bankruptcy they filed on June 1^st. It comes as an unsurprising finale to a decades-long free fall in market share and profits. Unfortunately, predictability and a comprehensive understanding of causality do little to soften the blows manufacturers, auto workers, and American citizens have had to endure and will continue to endure as a result of the collapse.

Analysts have jumped all over the bankruptcy, using it to reinforce long-held beliefs about business structure, efficiency, and government intervention. The story tends to be told the same way across the board: GM used expansive corporate organization throughout the middle of the century to thrive in a market where variety of products dominated. Then the company started losing to more efficiently made and higher-quality cars from automakers like Toyota. In a short span of time, GM went from controlling more than half of the American demand for cars to less than a quarter of the market. Bogged down by rigid union contracts and a stubborn adherence to a diverse and expansive corporate form, GM’s cost structure prohibited it from competing with its Japanese and European counterparts. Soon there was little to do but watch the downfall of an American manufacturing empire.

But despite the pervasive reports purporting inevitability, it did not have to happen this way. Like many economists, I tend to view market competition in terms of natural selection, in which corporations are self-evolving organisms and fitness is determined by their bottom lines. In good times, even unfit companies can survive; but when disaster strikes, the standards for fitness are dramatically heightened and the unfit are left for dead. The unhappy reality is that just when GM was making the changes it needed in order to survive in a competitive market, economic disaster struck and swept away its hopes for long-term recovery. GM may have been able to evolve to match the efficiency of its competitors, but demand dropped abruptly and left GM without the resources it required to actualize its evolution. At best the world demand for cars is at a low 60 million a year, but with the saturation of supply, more than 90 million cars a year are being produced. GM simply could not survive in a world so short in demand and so plentiful in supply.

What was the evolution that was occurring and why should we care? The changes included a renegotiation of GM’s contract with the United Auto Workers union such that pay of benefits were reduced to rates similar to their competition; a downsizing of the previously over-expanded corporate structure; and a successful commitment to producing less-costly and higher-quality cars. All of the changes were in place before the end of 2007, and all of them were contributing to improvements in GM’s market share. But the changes weren’t complete enough for GM to compete after the economic recession when only the strongest would survive; GM needed more time. The federal support of 50 billion dollars was intended to buy GM the time they needed, but, unsurprisingly, it was not enough. Most of the money was used to pay debts and pensions, doing little to lower costs of production. Additionally, demand has worsened, credit is less available, and structural changes take multiple years to realize.

We should care that GM was on the right track before the recession because it informs us of a couple important realities. First, American-made cars can be efficiently produced and can achieve a high level of quality; this means domestic automakers can match the cost structures of their foreign rivals if they are committed to efficiency, a commitment we saw from GM too little too late. And second, all American companies, especially in the manufacturing sector, have a lot to gain from less rigid union contracts; if we want workers to be protected in the areas of health care and retirement pensions then the government needs to incur the burden, not corporations that are being asked to compete internationally.

The federal bailout allocated 150 billion dollars for education, a 2-year commitment to education that should have doubled local school budgets. It would certainly be too early to notice significant gains in education, as new hirings and new investments would occur over the upcoming summer, but we would at the very least expect to see, for the time being, a static picture. But we see the opposite: schools are in a frenzy to stay alive, teachers are losing jobs, and special projects are being eliminated. If there is in fact so much money being graciously pumped into the education system by the federal government, why does education seem anything but static? Why are schools closing? Why are local budgets being dramatically cut? California, New York, Pennsylvania, and Arizona have all announced profound decreases in education spending, despite receiving education relief from the bailout. Many states are following suit. In the midst of the boldest federal commitment to education since world war II, educators are running for the hills instead of celebrating.

The answer is clear for even the most casual reader of the newspaper: Local funding for education is gone. The economic crisis has extirpated state finances, rendering state budgets for education closer and closer to zero. The result is the bailout money is unable to bolster education funding; instead it merely stops the bleeding, temporarily. Pennsylvania’s newest budget proposals are the most extreme, calling to replace all local education funding with federal bailout funding. And such proposals should come as no surprise: local governments have many needs, and any money available will be used to fill those needs. The old education funding is being reallocated to many other state programs that are not getting bailout assistance, smoothing state financing across local budgets.

It’s hard to be too upset about all this; the economy is suffering and one sector affected is education, regardless of relief efforts by the federal government. The problem is what is happening to the power structure in American education: as local funding is replaced by federal funding, state governments are conceding control of their education policies to the federal government, a power shift that could strip local schools of their control of curriculum, mapping, and resource allocation. Whether or not such a power shift is desirable is a debate open to talking heads and casual readers alike, but its implications should not be ignored. Are we ready for a more centralized education system? Are we prepared for the federal government to dictate more education policy? Should we be alright with a more far-reaching national bureaucracy involved in our schools?