Economics

Rethinking The Gruber Controversy: Americans Aren’t Stupid, But They’re Often Ignorant — And Why

flying cadeuciiM.I.T. economist Jonathan Gruber, whom his colleagues in the profession hold in very high esteem for his prowess in economic analysis, recently appeared before the House Committee on Oversight and Government Reform. Gruber was called to explain several caustic remarks he had offered on tortured language and provisions in the Affordable Care Act (the ACA) that allegedly were designed to fool American voters into accepting the ACA.

Many of these linguistic contortions, however, were designed not so much to fool voters, but to force the Congressional Budget Office into scoring taxes as something else. But Gruber did call the American public “stupid” enough to be misled by such linguistic tricks and by other measures in the ACA — for example, taxing health insurers knowing full well that insurers would pass the tax on to the insured.

During the hearing, Gruber apologized profusely and on multiple occasions for his remarks. Although at least some economists apparently see no warrant for such an apology, I believe it was appropriate, as in hindsight Gruber does as well. “Stupid” is entirely the wrong word in this context; Gruber should have said “ignorant” instead.

Stupid Versus Ignorant

“Stupid” means “unable to learn.” The American people, or for that matter any other people on earth, are not unable to learn. Just ask any military officer what youngsters with varied socio-economic backgrounds and without advanced formal education can learn if properly taught, as they are routinely when enrolled in the best educational institution in the United States, namely the armed forces.

“Ignorant” means “lacking knowledge.” It is altogether different from “stupid.” Can anyone seriously deny that large numbers of American voters are ignorant of the intricacies of many issues in public policy, especially when they involve economic analysis?

There are good reasons for this lack of knowledge.

Why American voters are often ignorant on policy questions. First, most public policies are highly complex and involve troublesome economic and ethical trade-offs among desirable goals. Mastering them takes careful study.

Second, Americans on average work substantially more hours per year than do citizens in most other developed nations. Voters in the U.S. simply do not have time to delve as deeply into these complexities as more narrowly focused experts can. I personally, for example, must confess complete ignorance on the intricacies of many policy issues outside my professional purview — for instance, global warming and climate control.

Third, hard as it is to be objectively and accurately informed on particular issues of public policy, there are large and well-financed industries on both sides of the political spectrum that bombard the public with judiciously biased information. And rather than enlightening the public on issues of public policy, the business model of the television media and some of the print media has gravitated more and more towards channeling preferred ideologies and carefully biased information. Thus the innocent idea to compensate physicians for helping their patients with composing living wills quickly became Third Reich“death-panels,” and the duly elected President of the United States found himself openly smeared as a Nazi.

Finally, and this must be said candidly as well, throughout the ages and to this day many members of the public have shown no interest in public policy at all, unless it hurts their own pocketbooks. Of that segment of the public, for example, the first century Roman poet Juvenal wrote in dismay, “Duas tantum res anxius optat, panem et circenses.” (Its anxious longing is confined to two things–bread and circus games.) These preoccupations can make people seek nourishment at the public trough all the while cursing government interference in their lives, as was so vividly reported in Benjamin Applebaum’s and Robert Gebeloff’s “Even Critics of Safety Net Increasingly Depend on It” in The New York Times(February 12, 2012). I am grappling with the search for an adjective to describe this peculiar posture. Is “ignorant” good enough?

The Ubiquity of Spinning    

Would anyone deny that in debating issues of public policy and crafting legislation, politicians and those who advise them often exploit the ignorance of the public, sending out their pollsters to extract from focus groups the verbal constructs that could help market their ideas to voters? In Washington it is called “spin.” Does “spinning” not lie at the core of our political culture?

Consumer driven health care … aka rationing by income. How many politicians, for example, would forthrightly and bluntly proclaim on the campaign trail that, to control the growth of health spending, they favor the rationing of health care by income class, that is, by price and ability to pay?

Yet that is precisely what they and their advisors are advocating when they promote health-insurance policies with very high deductibles and coinsurance. As any well-trained economist knows and some good textbooks in economics are careful to point out, prices in a market economy are instruments to ration scarce resources among people. So a market economy in health care that relies on high deductibles and coinsurance is not an alternative to rationing. It is just one of several methods of rationing.

To illustrate, consider two American families, one with an annual disposable income below the median family income of $50,000, and the other with an annual disposable income of $250,000. Would anyone expect these families to respond identically in their health behavior if confronted with an annual deductible of, say, $5,000, and an even higher annual maximum out-of-pocket spending of, say, $8,000? A recent Gallup poll suggests that one in three Americans put off medical treatments over costs, a number evidently related to income class. Surveys conducted by the Commonwealth Fundshow the same.

So if not advocating rationing by income class openly, how then do the politicians and their advisors favoring high-deductible health insurance policies market that idea to their constituents? They market it by the mellow verbal construct “Consumer Driven Health Care” (CDHC) that will “empower consumers of health care to make their own health care decisions” — although the usual absence of reliable information on the quality and the prices of health care available to consumers (formerly patients) effectively converts them into blind-folded shoppers in a bewildering shopping mall.

FSAs and employer coverage … or taking from the poor to give to the rich. Next, how many politicians would openly profess on the campaign trail that they favor making health care cheaper for high-income persons than for low-income persons?

Yet that is precisely what they are doing when they make tax deductible an employee’s annual deposits into a so-called Flexible Spending Account (FSA) or an individual’s deposits into a Health Savings Account (HSA). If a high-income person in a high marginal tax bracket pays for, say, a root canal or a major diagnostic test with funds in such a tax-sheltered account, the after-tax cost of that root canal will be much lower than it would be for a low-income person in a low marginal tax bracket, which ideally every citizen should understand.

Although it might be less obvious to lay persons, a similar economic analysis applies to the huge tax preference accorded employment-based health insurance. Under that tax preference, contributions made by employers to the premiums for the employees’ health insurance — on average usually 80 percent or so of the premium — are a tax-deductible business expense to the employer but are excluded from the employees’ taxable compensation. The annual loss of federal tax revenue caused by this tax preference is larger than the annual government spending on subsidies towards health insurance of lower-income people under the ACA.

Unperturbed by the inherent contradiction in their posture, the same politicians or business leaders who may decry the added “social spending” triggered by the ACA — for Medicaid expansions or subsidies toward the purchase of private health insurance on the health-insurance exchanges — think nothing of annually granting even high-income employees an even larger (in dollar terms) government subsidy toward the purchase of their health insurance. Can politicians and business leaders not be fully aware of this? On what economic or ethical principle did they grant that regressive subsidy? And how do they defend it to the public?

Tax preferences … or would spending by any other name smell as bad? Consider tax preferences in general. Many economists from time to time are likely to mutter under their breath unflattering remarks on politicians and their constituents in connection with such special legislative favors.

Economists call these tax preferences “tax expenditures” that are quite similar in their economic characteristics to regular government expenditures: If Congress wishes to achieve a balanced federal budget, at least over the business cycle, then the granting of a tax preference to some citizens or institutions implies either that other tax payers must pay added taxes to keep the budget balanced, or that other citizens must give up federal benefits they had hitherto enjoyed, a sacrifice that is also in the nature of a tax. And if these tax favors are temporarily added to the federal deficit, then future generations of taxpayers must pay added taxes to pay off the debt. Either way, then, granting tax preferences is economically akin to raising taxes on some people to grant other people a subsidy.

Harvard economist N. Gregory Mankiw has sought to explain this analytic insight in simple layman’s language in The New York TimesI explain to my first-year economics class in somewhat more technical terms that granting tax exemption or tax deductibility for expenditures on favored activities, or expenditures by favored constituents, is akin to granting a tax-financed ad valorem subsidy. An inevitable feature of this disguised ad valorem subsidy is that, with progressive tax rates, it bestows much larger subsidies on high-income families than on low-income families. If that is Congress’ intent, as well it may be, its members should say so openly.

Ideally, tax expenditures of this sort should be accounted for explicitly as part of the annual federal budget. In fact, they are not. This can explain why members of Congress on both sides of the aisle have long been so enamored with them. It allows them to make what amounts to federal expenditures in the guise of what appears to constituents as a tax cut.

In 2013, for example, total federal spending explicitly accounted for in the federal budget amounted to $3.8 trillion. (Table 1.1). Total tax expenditures not included in the budget that year amounted to $1.3 trillion, amounting to a 34 percent increase over explicitly budgeted expenditures. Naturally, economists watch with dismay when tax preferences of this sort are marketed to the public as something quite different from tax-and-transfer policies, especially by politicians who have pledged allegiance to anti-tax guru Grover Norquist, who defends tax preferences as tax cuts.

A Continuing Lack Of Understanding Of The ACA

Finally, can anyone deny that, after so much discussion in the past few years of the Affordable Care Act (ACA) in the print media, in online blog posts, and in the television media, the American people still do not seem to understand the nature and contents of that act?

We need not rely here on comedian Jimmy Kimmel’s marvelously entertaining amateur survey of passersby on that issue. Professional surveys have consistently shown massive confusion on the ACA. Indeed, as Forbes columnist Bruce Japsen puts it, citing a number of reliable sources, “Americans Don’t Understand Insurance, Let Alone ObamaCare, Research Shows.” Tracking polls regularly fielded by the Kaiser Family Foundation find much the same.

So one may call it stupid for Jonathan Gruber to call the American people stupid, as Gruber himself admitted in his testimony before Congress. But as a fellow economist, I do have empathy for him in his assertion that the political process routinely exploits the general public’s lack of understanding of the economic implications of so many aspects of public policy, health policy among them. I would venture to guess that most economists share that view.

“Siffing” The Wheat From The Chaff … And Selling The Chaff

In fact, in my efforts to prepare Princeton undergraduates for life among seasoned adults, I present to them a lecture entitled “The Art of Siffing Among Seasoned Adults,” where “to sif” is an acronym of “Structuring Information Felicitously.” “Siffing” differs from lying outright in that siffing involves structuring facts in a way that makes listeners conjure up false images in their minds. As already noted, in Washington it is called “spinning.”

“Lying,” on the other hand, involves making statements that are not true or citing made-up data. Economists themselves are not invariably above siffing when thrust into the pressure cooker of the political arena. The same, of course, is true of business leaders and, as noted, of political leaders. It is part of the human condition.

I also, however, have empathy for politicians who feel obliged to profess horror when someone calls their constituents “ignorant,” let alone “stupid.” Admitting it would not be a way to win votes. Professing abhorrence is.

Today’s Homework

Let me conclude this post with a professor’s prerogative, the assignment of a homework exercise. In chapter XV of his Democracy in America, Alexis de Tocqueville remarked thus on the democratic process in our land:

They [politicians] are forever talking about the natural intelligence of the people whom they serve; they do not debate the question which of the virtues of their master [the people] is pre-eminently worthy of admiration, for they assure him that he possesses all the virtues without having acquired them, or without caring to acquire them… Moralists and philosophers in America are not obliged to conceal their opinions under the veil of allegory; but before they venture upon a harsh truth, they say: ‘We are aware that the people whom we are addressing are too superior to the weakness of human nature to lose the command of their temper for one instant. We should not hold this language if we were not speaking to men whom their virtues and their intelligence render more worthy of freedom than all the rest of the world.’ The sycophants of Louis XIV could not flatter more dexterously.

Your assignment: What on earth might have prompted de Tocqueville to offer this remark?

Uwe Reinhardt is an economist at Princeton University. Reprinted with the author’s permission. Originally published The Health Affairs Blog Dec. 29th 2014. Copyright ©2010Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.

Livongo’s Post Ad Banner 728*90

Categories: Economics, OP-ED, THCB

Tagged as: , ,

31
Leave a Reply

19 Comment threads
12 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
12 Comment authors
Paul SlobodianPeter1Bob HertzWilliam Palmer MD@BobbyGvegas Recent comment authors
newest oldest most voted
William Palmer MD
Guest
William Palmer MD

It is sad and paradoxical that the folks who can barely afford the bronze plans with the 60% actuarial value are the same ones who have to pay such high deductibles and co-payments. I guess the actuaries have to do it this way. Possibly the subsidies cover it?

Saurabh Jha
Guest
Saurabh Jha

If you could suspend democracy for 8 years you can solve the cost problem.

The long run is a series of short runs.

In the short run votes matter.

Paul Slobodian
Guest

Most who have seriously looked at the medical system estimate the waste at 30%. Hadler estimates the waste to be as high as 50%. Significantly reducing the waste is painless for patients (actually a net improvement as excess testing and tx actually causes harm).

Agreed, there will be pain, but mostly from the purveyors of excessive services….and I think they will do just fine in the long run.

Saurabh Jha
Guest
Saurabh Jha

Oh, and the other thing about waste is the ex ante, ex post problem.

That is what is imminently waste after the event is not so self-evidently waste before the event.

Never under-estimate the rationality of absurdness.

Saurabh Jha
Guest
Saurabh Jha

Again, I’m not disputing that deductibles don’t have price elasticity. Of course, they do. It’s the other side of moral hazard.

My point is that they will cause pain to someone, somewhere initially.

That is the costs of the system cannot be reduced without shafting (you may substitute this word, the problem will be the same) someone, somewhere, some of the times.

There will be no reduction of costs without pain. And that pain won’t be uniform.

The problem is not economic theory, we all know the economics of how, but political reality.

Paul Slobodian
Guest

Saurabh

Here again is the relevant quote from the study:

but we found that savings occurred even when employers helped employees offset these out-of-pocket costs by making contributions to their accounts, [end of quote]

There is no difference if the offset comes from the employer or a govt paid credit….as long as the consumer keeps the funds not spent on services. The main party being “shafted” (to use your terminology) is the medical system that orders unecessary mri’s or non generic drugs when a generic is available.

Barry Carol
Guest
Barry Carol

Imaging is the classic category of tests where prices can vary enormously depending on whether it’s done in a hospital, a hospital owned standalone imaging center or an independent imaging center. It’s a test that’s non-invasive and not painful so patients usually don’t mind getting it if someone else is paying the bill. Many patients think more care is better care when often it isn’t and they equate more testing with “thorough” care even when it’s really wasteful or marginally useful at best. Skin in the game coupled with full price transparency can make a considerable difference in reducing inappropriate… Read more »

Saurabh Jha
Guest
Saurabh Jha

” Note, the supposed “shafting” can easily be ameliorated by an employer contribution (or govt credit) to cover the high deductible.”

Yes, high deductibles reduce cost because they force price elasticity, because there is financial skin in the game. I wager they would reduce end of life care, catastrophically.

High deductible = high cost to consumer = non-Pareto = someone worse off

High deductible subsidized or paid in entirety by Uncle Sam = no more price elasticity.

You can’t have it both ways, old chap.

Paul Slobodian
Guest

From Rand Corporation web site press release of a study published in a peer reviewed journal and paid by Robert Wood Johnson Foundation: [beginning of quote] Patients with health coverage that includes a high deductible and either a health savings account or a health reimbursement arrangement reduced their costs even after they initiated care. According to Haviland, at least three factors influenced the cost of care once the patient had initiated care: lower use of name-brand medications, less in-patient care and lower use of specialists. Researchers speculate that patients may talk to their doctors about their higher deductibles and ask… Read more »

Paul Slobodian
Guest

Peter1, Some good points….(except the alternative universe one)… Yes 401k fees are too high…..and the publicity about this increases pressures on corporate managers of such plans to offer investment choices with lower costs. What isn’t well known or much discussed is that the old defined benefit pension plans had even higher costs….actuarial fees and investment management fees that were completely hidden to employees and shareholders who ultimately bore the cost. Re the inscrutability of medical bills….agreed completely. The CBS interview and similar publicity about this builds up pressure on providers and the medical system to fix this problem. It will… Read more »

Peter1
Guest
Peter1

“It will take years and be messy”

Cold comfort Paul to those now legislated to buy ever non-affordable plans.

Guess you missed the part when Steven Brill said the lobbyists have a lock on DC, so any changes will probably never occur in time for many Americans struggling to pay for care – a situation you are probably not concerned about.

Look up the urban dictionary meaning of, “I’m All Right Jack”. It fits your point of view.

Saurabh Jha
Guest
Saurabh Jha

This where I find myself in the treacherous zone of agreement and disagreement with what you are saying.

a) Essentially, people will continue to get shafted unless the costs come down.

b) The costs won’t come down unless some people, ordinary people in ordinary circumstances, get shafted.

Both the right and the left deny (b).

No solution to healthcare can start without acknowledging (b). Failure to acknowledge (b) is where the deceit starts.

Paul Slobodian
Guest

Re high deductible “consumer driven” healthcare as rationing by another means: of course this is correct. All topics in Economics are about how goods and services are distributed….and thus about rationing. Consumer driven health care relies on individuals making choices for themselves and having some economic skin in the game….versus letting the IPAB or some other “expert” decide what one will have access to. Re “blind shoppers”….a valid point, but it is becoming less and less so as consumers ask for info from providers and more data about price and quality become transparent…..just as it happened when people started to… Read more »

Peter1
Guest
Peter1

Spoken like a true management and health plan consultant Paul. Of course the further up the economic ladder a person is means the success of so called “consumer driven” health plans and 401ks is better assured. Given the fees in 401k management and the below employer survey of 401k plans shows the often “unsavy” self direct is further behind but blindly satisfied. http://money.usnews.com/money/blogs/planning-to-retire/2011/01/31/6-ways-to-measure-the-success-of-a-401k-plan You might want to read Steven Brill’s new book, “America’s Bitter Pill”, interviewed on CBS this morning, at least see the video. He’s more educated than most, especially on health care – even he couldn’t figure out… Read more »

Bob Hertz
Guest
Bob Hertz

Barry, can you walk through why unions would defend tax preferences? Just curious.

Barry Carol
Guest
Barry Carol

Bob, In the private sector, for unions representing workers in old line industries like autos, steel, aluminum, coal mining, railroads, etc., when managements proposed even modest changes in health benefits like higher deductibles or slightly higher contributions toward the premium, it often became a strike issue which someone like me would view as irrational. However, the union mentality in most cases was something like: My father and my grandfather fought for this union card and our health benefits and we gave up wage increases to sustain those health benefits. Management isn’t going to cut them now. If they try to,… Read more »

Saurabh Jha
Guest
Saurabh Jha

Excellent and comprehensive explanation of the tyranny of status quo.

When analyzed rationally, status quo seems not as irrational or surprising as some might think.

Peter1
Guest
Peter1

I’m not sure “stupid” (unable to learn) is the wrong word. How many times over how many millenia have the “masses” grabbed at snake oil tactics – they never learn, just gobble it up like a chance to win the lottery.

Bob Hertz
Guest
Bob Hertz

Dr Palmer states that we have a relatively stable quantity of illnesses. But here is precisely where the genius (sic) of capitalism has been going to work. Drug companies and some doctors have been vigorously trying to expand the number of illnesses that should be counted as ordinary necessary care, including: – pre-diabetes – minor elevations in cholesterol and hypertension – male impotence – hyperactivity in young boys I am not a doctor, but as a layman the trend seems ominous. Let me go back to the tax issues raised by Prof. Reinhardt. I do not quite agree with him… Read more »

Barry Carol
Guest
Barry Carol

Bob, Good comments, most of which I agree with. Regarding the tax preference for employer provided health insurance, however, with the top marginal income tax rate now back to 39.6%, the preference is worth considerably more to high income people than to lower income people. Dr. Reinhardt is right about that. One way to mitigate this would be to carve it out as a separate category of paid wages that would not be subject to payroll taxes but would be subject to income tax less a flat credit or 25% or 28% of the age adjusted value of the premium… Read more »

William Palmer MD
Guest
William Palmer MD

We have a relatively constant quantity of total illness in 320 million, yet an increasing number of people living off the money flowing thru this illness in the form of premiums and government payments. It’s as if we are adding providers who do not see patients. If hc/gdp = 17%, then @ one in six of us is living off of health care. Thus, demand for these limited dollars is increasing; and it is no wonder that prices are high: there are too many folks in this sector. They are rushing in to help us fix the system– just as… Read more »

Rob
Guest

I think this is brilliantly written, as it does give insight into the collective ignorance (willful or not) of the American public. Unfortunately, I also agree that the ACA is, to a great extent, snake oil. It’s not the thing, as some would claim, that will bring us ruin, but instead it’s entirely focused on the wrong thing: access. The system is messed up not because of access, but the high cost of care. Care becomes “affordable” not because the cost of the care itself drops in cost, but because the cost of access to it does (insurance). One without… Read more »

Barry Carol
Guest
Barry Carol

Health insurance is expensive because healthcare is expensive. Health insurance is a highly competitive, low profit margin business. For example, insurers target a 5% pretax profit margin on their Medicare Advantage business. Medicaid business is even lower margin. Policies now being sold on the public exchanges are also producing margins in the low single digits for the most part. As for the ACA being about access, the political reality in both Massachusetts and nationally is / was that access had to come first and costs would be attacked later. The good news is that healthcare cost growth moderated significantly since… Read more »

@BobbyGvegas
Guest

“Health insurance is expensive because healthcare is expensive.”
__

And because only part of it is actual “insurance” (of the ruinous/catastrophic risk hedging variety), the rest continuing to be opaque, byzantine 3rd party intermediated pre-payment which cannot but up the cost.

Peter1
Guest
Peter1

“For example, insurers target a 5% pretax profit margin on their Medicare Advantage business.”

Wonder what it is for those non negotiable single policies? I don’t buy the poverty argument, 5% of a huge gross takes into consideration high wages, benefits, bonuses (See BCBS) and better health coverage than most can afford. It also does nothing to encourage premium savings as 5% of a higher number is – a higher number.

Years ago I was told insurance always covers profits by just building another office tower – see we’re not richer.

MD as HELL
Guest
MD as HELL

So slimy with shifting denominators. The guy is funded his HSA with his money that he earned. It is not useable unless used for healthcare. The root canal would not be done at all for either man, but for the incentive given by the government for the working earner to divert some income. No law keeping the other guy from getting on the income bandwagon and earning a living, earning an HSA, earning employer procured insurance. As for the ACA, it is snake oil. It is not affordable and you get no care. You get a huge premium for a… Read more »