Tuesday, December 30, 2014

SSDI Solutions Initiative Not Interested In Private/Market Solutions to Disability Insurance Disaster!

Update: The McCrery-Pomeroy conference was held and they recently posted their results here.  As I suspected/feared this was a banal affair. Improvements in the system, if any, will be minor/incremental. What a waste of human effort and life!
I received the following from the SSDI folks over the Christmas break:
Dear Dr. Wright, 

Thank you again for your interest in the SSDI Solutions Initiative. We reviewed all the proposals carefully and we regret to inform you that the Co-Chairs have not selected your proposal.

We received a large number of high quality proposals competing for very limited resources. While the Initiative thought your ideas were very promising, the highly competitive selection process forced us to make hard choices. We encourage you, however, to publish your ideas through other venues. The SSDI program is in critical need of reform and your contribution could help make a difference. 

We hope you will consider getting involved in the SSDI Solutions Initiative through other activities. For instance, we may be publishing shorter policy briefs in our website to help disseminate reform ideas and we will be reaching out to disability experts to serve as peer reviewers. Please let us know if you would be interested in either of these opportunities.

Project staff 
In the spirit of publishing my ideas "through other venues," I copy my proposal (and its addendum below) and will let readers decide what is really going on here. Of course I think that these folks aren't really interested in economic/practical solutions but rather in political ones. It is Fubarnomics all over again!

McCrery-Pomeroy SSDI Solutions Initiative
Proposal Submission Form

Author Name(s): Robert E. Wright
Institutional Affiliation(s): Augustana College SD
Proposed Paper Title: Mutual Security: Disability Insurance By, and For, the Masses
Email Address(es): Robert.wright@augie.edu
Phone Number(s):605-274-5312
Mailing Address: 2001 South Summit Ave./Sioux Falls, SD 57197
Do you have an employer or sponsor that is willing to compensate you for your time on this paper?                                                                                                                                                                        Yes                        No
If your employer or sponsor would like to be recognized for its contribution, what name should be used (or write “n/a”)?  Augustana College SD
If you will require a stipend to complete this project, how much will you require? Pro bono

The SSDI Solutions Initiative reserves the following rights: It may accept or reject any proposal or paper according to the selection criteria outlined in the call for papers. It may make any editorial changes it deems necessary to make a paper suitable for publication or to avoid infringing third-party rights or law. It may refuse to proceed with publication of any paper for any reason.
Neither selection of a proposal nor publication of a paper implies or reflects endorsement of that proposal or paper by the SSDI Solutions Initiative, its co-chairs, members of its advisory council, or any affiliated organizations.
Neither the SSDI Solutions Initiative nor any affiliated organization discriminates on the basis of race, creed, color, ethnicity, national origin, religion, sex, sexual orientation, gender expression, age, height, weight, disability status, veteran status, military obligations, or marital status.

Mutual Security: Disability Insurance By, and For, the Masses

Historical Background:
In the 1910s and 1920s, America’s insurers created a system of “private security” that included income insurance for people who died or became unable to work prior to accruing sufficient assets to retire. The unprecedented depth and length of the Great Depression effectively destroyed the disability insurance segment of that system by inducing an increase in disability claims larger than insurers had believed possible. The Social Security system moved into the resulting vacuum and to this day provides most “any occ” disability insurance, which defines disability as an inability to work at any job, while a few private insurers provide more extensive and expensive “own occ” disability policies, which define disability as an inability to work in one’s chosen occupation.

The Case for Privatization:
The Social Security Disability Insurance (SSDI) system has long been beset by the types of problems endemic to large government programs (cf. Peter H. Schuck, Why Government Fails So Often and How It Can Do Better [2014]). Moreover, no compelling economic reason why disability insurance needs to be provided by the government has been shown. Disability insurance certainly is not a public good as the private system worked well until the Great Depression and the high-end, private part of the market today functions as well as can be expected given the constraints placed upon it. Tellingly, the government also insinuated itself into the life insurance market by providing Social Security beneficiaries with a death benefit but wisely allowed its influence to dissipate by not raising the benefit level as inflation eroded it away.

Privatizing the Mutual Way:
Critics of the re-privatization of disability insurance fear that premiums will increase, as will the percentage of Americans without coverage. If the policy mistakes made in health insurance during and after the Great Depression (through employers and via joint-stock/publicly-traded insurers) are repeated, such a dire outcome could certainly transpire. I propose, instead, that disability insurance be offered directly to individuals and only by mutual insurers. Policyholders, not stockholders, own mutual insurers, which have a long history of providing a wide range of quality, low-cost life, casualty, and other insurances. The success of mutual insurance is rooted in incentives: mutual managers do not have to make quarterly numbers to please distant investors, so they can concentrate on long-term projects aimed at helping the insurer’s customers/owners.

Government’s Roles:
First, current SSDI recipients should continue to receive the benefits promised them and pending claims should be processed under the current (or improved) guidelines. As those claims are determined and recipients return to the workforce, transition to other programs (like OASI), or pass away, SSDI will slowly fade away, allowing natural attrition to shrink its workforce without major disruptions. Second, if disability insurance is too expensive, the government should reduce regulatory costs for insurers and encourage new entry and allow the subsequent increase in competition to reduce premiums. If necessary, it should establish and pay the start up costs of additional mutual insurers. Third, the government will also have to create some mechanism for ensuring that Americans purchase adequate disability insurance coverage. A compliance system linked to taxes or the healthcare mandate may be the most cost-effective method. Finally, the government may want to subsidize premiums for low income individuals.

By mutualizing the provision of disability insurance, the government will no longer be in the expensive business of “improving the disability determination process, modernizing determination criteria and program eligibility, strengthening program integrity and management” and so forth because it will have essentially outsourced those problems not just to insurers but, via mutualization, to the insureds themselves. The wisest public policies do not directly solve problems but rather create environments conducive for individuals or businesses to mitigate them.
October 29, 2014 
Dear Mr. Wright,

Thank you once again for submitting a proposal to the McCrery-Pomeroy SSDI Solutions Initiative. We are giving every potential author the opportunity to submit a one-page addendum to their proposal. The purpose of this addendum is to complement the initial submission with any additional information that authors consider relevant and to allow an opportunity to clarify questions raised by the project staff about the proposal. If you choose to submit an addendum, we ask that you please consider addressing the following questions, though you are not required to do so: 

1. Do you think the private insurance industry is currently equipped for such a shift and, if not, will you address what will be necessary to get them there in your paper? 
2. Given the dramatic change proposed, will the paper include a discussion on any proposed interim steps towards the new system?
3. Will you address the potential distributional implications of a move from public to private insurance?

In case you write an addendum, you do not need to answer the individual questions one by one. It would be preferable if you could address these questions in your narrative. We request that you submit the short addendum by next Wednesday November 5th or let us know if you need additional time. 

Project staff

McCrery-Pomeroy SSDI Solutions Initiative – Invited Addendum to Wright’s Mutual Security Proposal

The mutual insurance industry is only partially prepared at present for the proposed shift. It certainly has the general expertise but of course it does not currently have the capacity because the government effectively monopolizes the large, low end of the market. The paper will outline discussions with mutual insurers regarding an appropriate implementation timeline and phase-in strategy. 

Consumers, too, will need time to adjust, as will universities, like the University of Pennsylvania, that offer professional insurance-related instruction. The paper will include summaries of discussions with the latter about phase-in but due to budget limitations can offer only general guidelines based on secondary research about how to approach the former, who, generally speaking, have little knowledge of disability insurance (public, private, or mutual) at present. For example, replacing stock market-based curricula with insurance-based education in primary and second schools may prove helpful as everyone needs disability insurance but relatively few people need to trade individual stocks.

The distributional implications of a move to mutual disability insurance will be discussed, but they are difficult to parse because it is not clear what the market will look like given the complex regulatory environment, hence the suggestion in the “Government’s Roles” section that the government should be prepared to subsidize premiums for lower income Americans, especially at first. Of course regulations can change over time, especially when a large or powerful constituency, like a mutual insurer with millions of policyholders, desires reforms. Moreover, markets generally supply consumers with more options than government programs do, so some Americans will opt for disability policies that are more costly than SSDI but that provide them with a more individualized fit given their risk perceptions and preferences. That means that, although we must presume that Americans would not knowingly render themselves less well off, the distributional implications of privatization (specifically in this case mutualization) will be difficult to discern even ex post.

Finally, it is difficult to predict what mutualization may bring in terms of future business innovation. Some economists, for example, believe that life, health, and disability insurance will be most efficiently (and hence inexpensively) offered in a single insurance policy. So even if mutualization proves regressive in the short-term, it may lead to innovations that will prove progressive in the longer term.

Tuesday, December 09, 2014

Don't Throw Out the Baby along with the Dirty Diaper!

Yeah, I know, the actual expression is "Don't throw out the baby with the bathwater!" It means don't jettison the good stuff (the baby) when you get rid of the bad stuff (bathwater). I changed it because bathwater is pretty homogenous and I want to differentiate between two different bad things when I chastise certain critics of "capitalism." To be clear, I think "capitalism" is not a particularly helpful term for a number of reasons but it is au courant with the history crowd at present, as in the growing "History of Capitalism" subfield. Most of its practitioners are critics of "capitalism" (which is good) but critics who go to far and throw out the baby along with the dirty diaper. The good part of capitalism (the baby) is of course competition (price competition holding quality constant). The bad parts are asymmetric information (the pooh pooh, the natural product of the baby/markets) and rent seeking (the diaper, which like political favors is unnatural and will burden future generations).

For more on concepts like price competition, asymmetric information, and rent seeking, feel free to peruse my oeuvre.

Thursday, October 02, 2014

Daschle Dialogues Tweets

Last night (10/2/14), I attended the first annual "Daschle Dialogue" at South Dakota State University. I post my tweets of the event below, with editorial comments in [square] brackets.

[Tom = Daschle (we call our Reps and Senators by their first names here in So. Dak. Keep 'em in their place!)
Lott = Trent Lott]

@ Daschle Dialogues at So. Dak. SU in Brookings 2nite. "How Much Partisanship Is Too Much?" Tom. D-SD + Trent Lott R-Miss.

Pretty packed house here at . Will the speakers deliver?

It begins. After the hoopla & jokes, Tom says he owes it all to education, esp his SDSU degree. Whatifaugie? I wonder [what Tom's career would have been like if he went to Augustana College instead of State.]

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Waving the "bloody flag," not of the Civil War, the Great War, or the "Big One" (WWII), but of 9/11. Lott says song spontaneous and historic[.]

Lott is pandering so hard that he must be running for president! [Sarcasm, of course]

Frightening how unready Congress was for the attacks and how easily these "leaders" conflated desire for revenge with real bipartisanship.

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Tom says they did the best they could given the "intelligence" they had. I thought he meant from God or DNA at first! [More sarcasm]

Tom says transparency has a high cost so Senate used to meet behind closed doors and Senators "poured their hearts out" during those mtgs.!

Tom and Lott are friends. Maybe there is hope for Reynold [Nesiba] and myself???? Naaaaaaaaaahhhhh! [Inside joke]

Hypothesis: Tom and Lott are pulling an Adams-Jefferson, i.e. rewriting history to further their own image in Clio's oft dull eyes. [Key insight of the evening.]

Tom laments Senate in session only 109 days per year. Isn't that a good thing???? Does suggest per diems would be appropriate payscale.

Lott says we need "leaders that [sic] will lead." If he means NON-partisan statespeople, amen!

Tom says major problems are the "money chase" and partisan news outlets. BUT he likes Obamacare and has no problem w/ partisan vote for it.

Lott says Clinton and Bush talked regularly to senior Congressmen but Obama apparently doesn't. Wants candidates to say what they are FOR.

Lott says he supports MODIFYING Obamacare. Guess he is not running for President after all. [Yes, more sarcasm.]

Student q[uestion]s! = what da f 2 do about student debt? Tom's answer evasive. Lott's response rambling, personal: low i[nterest rate] loans, workstudy.

what about service to country for students? Tom in favor for $ [for college] & citizenship reasons.

 OMG! Tom says medical salaries will INCREASE with universal healthcare. Lott says his many docs are worried about $ decreases in future.

Lott says McCain Feingold created the SuperPAC campaign finance problem we have today. I did not know that McCain was on SCOTUS! [Yes, more sarcasm.]

Lott's favorite presidents = Washington, Jefferson, Lincoln, and Reagan. He liked Clinton, who he called "Slick." Bill called him "redneck."

Lott says he & Tom were both from poor, rural backgrounds and so valued courtesy: knew 2 smile at somebody before you shoot him. [That was a joke, on Lott's part.]

Lott says fed gvt should defend the shores, deliver the mail, and stay the hell out of the way. Q: does he really think we need USPS? [Honestly.]

I left about 3 minutes early to beat the rush out of the parking lot as it was late and I had a 1 hour drive ahead of me. For more coverage, see the Sioux Falls Argus Leader.

Friday, September 26, 2014

Modern Abolitionists Beware the Half-Truths of Baptist; Or, the Critique The Economist Should Have Made

Edward Baptist’s The Half Has Never Been Told: Slavery and the Making of American Capitalism contains a dangerous message for 21st century abolitionists: slavery undoubtedly causes economic growth. Baptist is so certain of this claim, in fact, that he asserts that “it is the truth” (p. xii) and that his “true narrative” establishes it (p. xxii).

There is much to admire about the book, especially if one is sympathetic to the reparations movement or wants to empower African Americans by labelling them the makers of the modern economy and backing it with hundreds of pages of text and thousands of scholarly references.

For those of us fighting the sundry new forms of slavery today, however, Baptist’s message is potentially pernicious as it could be used to justify enslavement, from trafficked children to debt peons to convict laborers. The Western world owes its wealth to slavery, the argument would go, so it should stand aside and allow the rest of the world to do likewise. A similar argument has already been made to justify child wage labor and pollution in less developed countries.

Thankfully, Baptist’s thesis is not just wrong-headed, it is wrong, or at least wrong enough to render its use as a pro-slavery argument ineffective. For starters, Baptist confuses sufficient and necessary causes. That is unsurprising as he does not engage, and quite frankly appears utterly oblivious to, recent scholarship in financial and economic history outside of the narrow slavery literature. Sustained economic growth (consistent increases in real per capita income over decades and even centuries) could not have been monocausal, this literature shows, but rather resulted from complex interactions between governments, financial systems, legal precedents, entrepreneurs (including enslavers) and laborers (including the enslaved). None alone were sufficient causes of growth but some were necessary causes. For example, if one removed republican government from the early U.S. scene, growth would not have happened there (e.g., Latin America). Other causes, like slavery, were present but incidental. Had they been removed from the economy, growth would still have occurred after the necessary causes appeared (e.g., Canada).

Second, Baptist confuses profitability with economic efficiency. Baptist correctly notes that some scholars have argued that slavery was unprofitable but those views have long since been swept aside by both evidence and common sense. But the profitability of producers does not necessarily lead to economic efficiency, the proximate cause of economic growth, if one or more market failures intercede. Consider, as the most salient example, the recent financial crisis, which proved highly profitable for a few while hurting the overall economy.

Monopolies are probably the most widely known market failure but they were not much of a factor in the antebellum South. The ill effects of pollution are also widely understood and, unlike monopoly, germane to the slavery question. Pollution is just one example of a broader class of market failure called negative externalities, which occur when some of the costs of production are borne by the economy at large rather than by buyers and sellers. Slavery produced numerous, significant negative externalities (e.g,. slave patrols, public whipping stations, fugitive slave acts, etc.) worth far more than slavery’s marginal productivity (its productivity minus the productivity of the next most productive alternative labor system, which was not debt peonage!).

At the root of many of the negative externalities produced by chattel slavery was the resistance of the enslaved: running away, feigning sickness, breaking tools, behaving in an “uppity” manner, and so forth. The enslaved and formerly enslaved, with help from abolitionists, eventually managed to impress upon many Northerners the costs/negative externalities that slavery imposed upon the overall economy and thus prepared the way for emancipation.

Not only could this counter narrative be used to uplift African Americans today, it is closer to “truth” than what Baptist has mustered, at least by half. The counter narrative also reserves a place for abolitionists and leaves no room for claims that slavery, then or now, is good for the economy. Then as now, enslaving people is a sin that enriches the enslaver but does not drive growth.

Thursday, July 24, 2014

Rediscovering the Road Less Traveled

It is no secret that most Americans want to spend part of their short time on this planet doing fun things in interesting places. That means they want to travel, and to do so safely, quickly, and, ultimately, efficiently. Unfortunately, getting around this great nation is becoming ever more dangerous, time consuming, expensive, and even unfair.

Transportation woes already accost Americans almost daily and more troubles loom on the horizon. The vast bulk of America’s transportation infrastructure -- the airports, bridges, canals, ports, roads, railroads, and tunnels that speed Americans to their vacation destinations and, more importantly, also allow them to trade with other Americans and the rest of the world -- is aging faster than the government can fix it. The federal highway trust fund is essentially bankrupt, kept temporarily afloat with legislative bandages while commute times and accident rates remain sky high and bridges collapse due to disrepair and poor management.

The best solution to the crisis is to privatize the nation’s transportation infrastructure, i.e., to sell (or lease) it to private companies. Done properly, privatization would make traveling the country safer, faster, more efficient, and fairer, much as it was, adjusting for changes in technology, in the nineteenth century.

For the last century or so, governments, especially the one in Washington, have financed and controlled the bulk of the country’s transportation infrastructure. So it seems natural to look to the federal government to control and finance our bridges, roads, railroads, and so forth. But there are economic and moral reasons why national ownership of transportation infrastructure is in crisis and why Congress cannot find a fix.

One government-based solution is to increase fuel taxes at the pump but that is unfair because such taxes are regressive – they fall hardest on the poor – and inefficient because the number of gallons spent on fuel is a poor proxy for how much wear a vehicle places on roads and bridges, which is mostly a function of speed, weight, and number of axles.

Government could also pay for infrastructure out of general tax revenues but that is unfair to those who do not use the infrastructure. Why should South Dakotans subsidize Amtrak, which has a total of zero stations in their state? Likewise, why should someone who does not own an automobile pay to fill potholes in I-90? Why can’t Americans pay for the infrastructure they use, just as they do with most other things in life?

A private transportation system would be “pay as you go.” That means tolls but lower ones than you might expect. Most tolls collected today go not to private companies but to government agencies that waste them (Google “corruption” and “Pennsylvania Turnpike” for an inkling) or use them to subsidize other parts of the transportation system (for example, Golden Gate Bridge users subsidize Bay area ferry and bus service).

New technology makes toll collection cheap and easy, eliminating one of the major rationalizations of transportation infrastructure nationalization in the early twentieth century. (Tolls can even be adjusted in real time to alleviate congestion.) The differences between competitive and monopolistic markets are better understood today, as well, reducing the risk of “highway robbery” at the tolls. Even local bridges, roads, and tunnels could be privatized, as many were in the nineteenth century.

Amtrak could also be privatized. Passenger rail died in this country after World War II because of government over-regulation and its subsidization of the interstate highway system. Railroads will probably never regain their cultural status or economic importance but they can provide efficient service in some congested corridors. Florida, in fact, recently permitted a private company to build and operate a new rail system between Miami and Orlando that looks promising. Even if it fails, however, the burden will fall on its investors, not taxpayers.

Investors want to generate profits, of course, but that does not necessarily, or even often, mean high prices or shoddy products so long as markets remain competitive. Think of all of the wonderful products you consume, from chewing gum to vodka, that stem from the efforts of entrepreneurs backed by private investors or large, publicly-traded corporations. Imagine what those same products would be like if only the government provided them. (If you can’t, look up what consumer products were like in the Soviet Union or other communist countries, if they could be had at all.) 

Why is transportation infrastructure any different from beds, haircuts, or televisions? Private transportation companies will work hard to get you to use their road or mode of transportation by offering better value and that means safer, faster, fairer, and cheaper travel options.

For additional reading, see two publications due out in the next month or so:
Robert E. Wright, “The Pivotal Role of Private Enterprise in America’s Transportation Age, 1790-1860.” Journal of Private Enterprise 29, 2 (Spring 2014), 1-20.
Robert E. Wright, “Specially Incorporated Transportation Companies in the United States to 1860: A Comprehensive Tabulation and Its Implications,” Journal of Business and Economics 5, 7 (July 2014), 249-66.