Tag Archives: Arnold Kling

Beware of Government Health Care Yet To Come

02 Sunday Feb 2025

Posted by in Health Care

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Ongoing increases in the resources dedicated to health care in the U.S., and their prices, are driven primarily by the abandonment of market forces. We have largely eliminated the incentives that markets create for all buyers and sellers of health care services as well as insurers. Consumers bear little responsibility for the cost of health care decisions when third parties like insurers and government are the payers. A range of government interventions have pushed health care spending upward, including regulation of insurers, consumer subsidies, perverse incentives for consolidation among health care providers, and a mechanism by which pharmaceutical companies negotiate side payments to insurers willing to cover their drugs.

It’s not yet clear whether the Trump Administration and its “Make America Healthy Again” agenda will serve to liberate market forces in any way. Skeptics can be forgiven for worrying that MAHA will be no more than a cover for even more centrally-planned health care, price controls, and regulation of the pharmaceutical and food industries, not to mention consumer choices. Robert F. Kennedy Jr., who is likely to be confirmed by the Senate as Donald Trump’s Secretary of Health and Human Services, has strong and sometimes defensible opinions about nutrition and public health policies. He is, however, an inveterate left-winger and is not an advocate for market solutions. Trump himself has offered only vague assurances on the order of “You won’t lose your coverage”.

Government Control

The updraft in health care inflation coincided with government dominance of the sector. Steven Hayward points out that the cost pressure began at about the same time as Medicare came into existence in 1965. This significantly pre-dates the trend toward aging of the population, which will surely exacerbate cost pressures as greater concentrations of baby boomers approach or exceed life expectancy over the next decade.

Government now controls or impinges on about 84% of health care spending in the U.S., as noted by Michael F. Cannon. The tax deductibility of employer-provided health insurance is a massive example of federal manipulation and one that is highly distortionary. It reinforces the prevalence of third-party payments, which takes decision-making out of consumers’ hands. Equalizing the tax treatment of employer-provided health coverage would obviously promote tax equity. Just as importantly, however, tax-subsidized premiums create demand for inflated coverage levels, which raise prices and quantities. And today, the federal government requires coverages for routine care, going beyond the basic function of insurance and driving the cost of care and insurance upward.

The traditional non-portability of employer-provided coverage causes workers with uninsurable pre-existing conditions to lose coverage when they leave a job. Thus, Cannon states that the tax exclusion for employer coverage penalizes workers who instead might have chosen portable individual coverage in a market setting without tax distortions. Cannon proposes a reform whereby employer coverage would be replaced with deposits into tax-free Universal Health Accounts owned by workers, who could then purchase their own insurance.

In 2024, federal subsidies for health insurance coverage were about $2 trillion, according to the Congressional Budget Office (CBO). Those subsidies are projected to grow to $3.5 trillion by 2034 (8.5% of GDP). Joel Zinberg and Liam Sigaud emphasize the wasteful nature of premium subsidies for exchange plans mandated by the Affordable Care Act (ACA), better known as Obamacare. Subsidies were temporarily expanded in 2021, but only until 2026. They should be allowed to expire. These subsidies increase the demand for health care, but they are costly to taxpayers and are offered to individuals far above the poverty line. Furthermore, as Zinberg and Sigaud discuss, subsidized coverage for the previously uninsured does very little to improve health outcomes. That’s because almost all of the health care needs of the formerly uninsured were met via uncompensated care at emergency rooms, clinics, medical schools, and physician offices.

Proportionate Consumption

Perhaps surprisingly, and contrary to popular narratives, health care spending in the U.S. is not really out-of-line with other developed countries relative to personal income and consumption expenditures (as opposed to GDP). We spend more on health care because we earn and consume more of everything. This shouldn’t allay concern over health care spending because our economic success has not been matched by health outcomes, which have lagged or deteriorated relative to peer nations. Better health might well have allowed us to spend proportionately less on health care, but this has not been the case. There are explanations based on obesity levels and diet, but important parts of the explanation can be found elsewhere.

It should also be noted that a significant share of our decades-long increases in health care spending can be attributed to quantities, not just prices, as explained at the last link above.

Health Consequences

The ACA did nothing to slow the rise in the cost of health care coverage. In fact, if anything, the ACA cemented government dominance in a variety of ways, reinforcing tendencies for cost escalation. Even worse, the ACA had negative consequences for patient care. David Chavous posted a good X thread in December on some of the health consequences of Obamacare:

1) The ACA imposed penalties on certain hospital readmissions, which literally abandoned people at death’s door.

2) It encouraged consolidation among providers in an attempt to streamline care and reduce prices. This reduced competitive pressures, however, which had the “unforeseen” consequence of raising prices and discouraging second opinions. The former goes against all economic logic while the latter goes against sound medical decision-making.

3) The ACA forced insurers to offer fewer options, increasing the cost of insurance by encouraging patients to wait until they had a pre-existing condition to buy coverage. Care was almost certainly deferred as well. Ultimately, that drove up premiums for healthy people and worsened outcomes for those falling ill.

4) It forced drug companies to negotiate with Pharmacy Benefit Managers (PBMs) to get their products into formularies. The PBMs have acted as classic middlemen, accomplishing little more than driving up drug prices and too often forcing patients to skimp on their prescribed dosage, or worse yet, increasing their vulnerability to lower-priced quackery.

The Insurers

So the ACA drastically increased the insured population (including the new burden of covering pre-existing conditions). It also forced insurers to meet draconian cost-control thresholds. Little wonder that claim rejection increased, a phenomenon often at the root of public animosity toward health insurers. Peter Earle cites several reasons for the increase in denial rates while noting that claim rejection has made little difference in insurer profit margins.

Matt Margolis points out that under the ACA, we’ve managed to worsen coverage in exchange for higher premiums and deductibles. All while profits have been capped. Claim denials or delays due to pre-authorization rules (which delay care) have become routine following the implementation of Obamacare.

Perhaps the biggest mistake was forcing insurers to cover pre-existing conditions without allowing them to price for risk. Rather than forcing healthy individuals to pay for risks they don’t face, it would be more economically sensible to directly subsidize coverage for those in high-risk pools.

Noah Smith also defends the health insurers. For example, while UnitedHealth Group has the largest market share in the industry, its net profit margin of 6.1% is only about half of the average for the S&P 500. Other major insurers earn even less by this metric. Profits just don’t explain why American health care spending is so high. Ultimately, the services delivered and charges assessed by providers explain high U.S. health care spending, not insurer profits or administrative costs.

Under the ACA, insurance premiums pay the bulk of the cost of health care delivery, including the cost of services more reasonably categorized as routine health maintenance. The latter is like buying insurance for oil changes. Furthermore, there are no options to decline any of the ten so-called “essential benefits” under the ACA, thus increasing the cost of coverage.

Medical Records

Arnold Kling argues that the ACA’s emphasis on uniform, digitized medical records is not a productive avenue for achieving efficiencies in health care delivery. Moreover, it’s been a key factor driving the increasing concentration in the health care industry. Here is Kling:

“My point is that you cannot do this until you tighten up the health care delivery process, making it more rigid and uniform. And I would not try to do that. Health care does not necessarily lend itself to being commoditized. You risk making health care in America less open to innovation and less responsive to the needs of people.

“So far, all that has been accomplished by the electronic medical records drive has been to put small physician practices out of business. They have not been able to absorb the overhead involved in implementing these systems, so that they have been forced to lose their independence, primarily to hospital-owned conglomerates.”

Separating Health and State

The problem of rising health care costs in the U.S. is capsulized by Bryan Caplan in his call for the separation of health and state. The many policy-driven failures discussed above offer more than adequate rationale for reform. The alternative suggested by Caplan is to “pull the plug” on government involvement in health care, relying instead on the free market.

Caplan debunks a few popular notions regarding the appropriate role for markets in health care and health insurance. In particular, it’s often alleged that moral hazard and adverse selection would encourage unhealthy behaviors and encourage the worst risks to over-insure, causing insurance markets to fail. But these problems arise only when risk is not priced efficiently, precisely what the government has accomplished by attempting to equalizing rates.

Pulling the plug on government interference in health care would also mean deregulating both insurance offerings and pricing, encouraging the adoption of portable coverage, expediting drug approvals based on peer-country approvals, reforming pharmacy benefit management, ending deadly Medicare drug price controls, and encouraging competition among health care providers.

Value Vs. Volume

There are a host of other reforms that could bring more sanity to our health care system. Many of these are covered here by Sebastian Caliri, with some emphasis on the potential role of AI in improving health care. Some of these are at odds with Kling’s skepticism regarding digitized health records.

Perhaps the most fundamental reforms entertained by Caliri have to do with health care payments. One is to make payments dependent on outcomes rather than diagnostic codes established and priced by the American Medical Association. To paraphrase Caliri, it would be far better for Americans to pay for value rather than volume.

Another payment reform discussed by Caliri is expanding direct payments to providers such as capitation fees, whereby patients pay to subscribe to a bundle of services for a fixed fee. Finally, Caliri discusses the importance of achieving “site-neutral payments”, eliminating rules that allow health systems to charge a higher premium relative to independent providers for identical services.

For what it’s worth, Arnold Kling disagrees that changing payment metrics would be of much help because participants will learn to game a new system. Instead, he emphasizes the importance of reducing consumer incentives for costly treatments having little benefit. No dispute there!

Avoid the Single-Payer Calamity

I’ll close this jeremiad with a quote from Caliri’s piece in which he contrasts the knee-jerk, leftist solution to our nation’s health care dilemma with a more rational, market-oriented approach:

“Single payer solutions and government control favored by the left are no solutions at all. Moving to a monopsonist system like Canada is a recipe for strangling innovation and rationing access. Just ask our neighbors to the north who have to wait a year for orthopedic surgery. The UK’s National Health Service (NHS) is teetering on the brink of collapse. We need to sort out some other way forward.

“Other parts of the economy provide inspiration for what may actually work. In the realm of information technology, for example, fifty years has taken us from expensive four operation calculators to ubiquitous, free, artificial intelligence capable of passing the Turing Test. We can argue about the precise details but most of this miracle came from profit-seeking enterprises competing in a free market to deliver the best value for the buyer’s dollar.“

Tangled Up In Green Industrial Policy: Joe Biden’s Electrification

28 Thursday Mar 2024

Posted by in Government Failure, Industrial Policy, Liberty

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Industrial policy allows government planners to select favored and disfavored industries or sectors. It thereby bypasses and distorts impersonal market signals that would otherwise direct scarce resources to the uses most valued by market participants. Instead, various forms of aid and penalties are imposed on different sectors in order to accomplish the planners’ objectives, This includes interventions in foreign trade and attempts to steer technological development. Industrial policy often comes under the guise of enhanced national security. Of course, it can also be used to reward cronies. And it has a poor record of accomplishing its objectives and avoiding unintended consequences.

The Sausage Factory

The executive and legislative branches of the U.S. government are loaded with economic interventionists, regardless of party affiliation. In an age of (Chevron) judicial deference to “experts” within the administrative state, it is not uncommon for legislative language to give abundant leeway to those who implement policy within the executive branch (though a couple of upcoming Supreme Court decisions might change that balance). Increasingly, bills are stuffed so full of provisions that lawmakers find it all but impossible to read them in full, let alone make an accurate assessment of their virtues, drawbacks, and internal contradictions.

Even worse is the fact that bills are, in great part, written by relatively youthful legislative staffers with little real world experience in industry, and who harbor the naive belief that whatever is wished, government can make it so. But their work also proceeds under guidance from lawmakers, administration officials, consultants, and lobbyists who have their own agendas and axes to grind. This is how industrial policy is promulgated in the U.S., and it is through this ugly prism that we must view environmental policy.

The Left dictates environmental and energy policy in several states, especially California, where energy costs have soared under renewable energy initiatives. California households now pay almost triple the rate per kilowatt-hour paid in Washington, and more than double what’s paid in Oregon. Something similar may happen in New York, which has highly ambitious goals for renewable energy even as the costs of the state’s offshore wind projects are out of control. These and other state-level “laboratories” are demonstrating that a renewable energy agenda can carry very high costs to the populace. The same is true of the painful experience in Germany with its much-heralded Energiewende.

Net Zero

The Left is also pulling the strings within the federal bureaucracy and the Biden Administration. The objective is an industrial policy to achieve “net zero” CO2 emissions, a practical impossibility for at least several decades (unless it’s faked, of course). Nevertheless, that policy calls for phasing out the use of fossil fuels. Under this agenda, mandates and subsidies are bestowed upon the use of renewable electric power sources, while restrictions and penalties are imposed on the production and use of fossil fuels. A subsequent post on the subject of power generation will address this prototypical failure of central planning.

Electrification

Here, I discuss another key objective of our industrial planners: electrify whatever is not electrified in order to advance the net zero agenda. Of course, for some time to come, more than half of electric power will be generated using fossil fuels (currently about 60%, with another 18% nuclear), so the policy is largely a sham on its face, but we’ll return to that point below. The EV tailpipe is very long, as they say.

Electrification means, among other things, the forced adoption of electronic vehicles (EVs). President Biden’s EPA has issued rules on auto emissions that are expected to require, by 2032, that 60% or more of cars and light trucks sold will be EVs. The USA Today article at the link offers this rich aside:

“…the original proposal — which was always technology-neutral in theory, meaning automakers could sell any cars and light-duty trucks they wanted as long as they hit the fleetwide reductions….”

Technology neutral? Hahaha! We aren’t forcing you to choose technologies as long as you meet our technological requirements!

EV Doldrums

Anyway, the EPA’s targets are completely impractical, partly because the value for drivers is lacking. Not coincidentally, the market for EVs seems to have chilled of late. Hertz has soured on heavy use of EVs in its fleet, and Ford has announced reductions in EV production. The new UAW agreements will make it difficult for some domestic producers to turn a profit on EVs. Fisker is just about broke. Apple has cancelled development of its EV, and several other automakers have reduced their production plans. Toyota was the first producer to raise the red flag on the breakneck transition to EVs in favor of a measured reliance on hybrids. Of course, there are other prominent voices cautioning against rapid attempts at electrification in general.

To be fair, some EVs are marvelous machines, but they and their supporting infrastructure are not yet well-suited to the mass market.

A Tangled Web

Here are some drawbacks of EVs that have yet to be adequately addressed:

  • They are expensive, even with the rich-man’s subsidy to buyers paid by the government and carbon credit subsidies granted to producers.
  • Costly battery replacement is an eventuality that looms over the wallets of EV owners.
  • EVs have limited range given the state of battery technology, especially when the weather is cold.
  • There presently exist far too few charging stations to make EVs workable for many people. In any case, charging away from home can be extremely time consuming and the charges vary widely.
  • The purchase and installation of EV chargers at home is a separate matter, and can cost $4,000 or more if an upgrade to the service panel is necessary. Installed costs commonly range from $1,175 to $3,300, depending on the type of charger and the region.
  • EVs are much heavier than vehicles powered by internal combustion engines. As a result, EV tire wear can be a surprising cost causer and pollutant.
  • Used EVs are not in demand, given all of the above, so resale value is questionable.
  • Battery fires in EVs are extremely difficult to extinguish, creating a new challenge for emergency responders.
  • Reliance on EVs for local emergency services would be dangerous without duplicative investment by local jurisdictions to offset the down-time required for charging.
  • For decades to come, the power grid will be unable to handle the load required for widespread adoption of EVs. A rapid conversion would be impossible without a great expansion in generating and transmission capacity, including transformer availability.
  • Domestically we lack the natural resources to produce the batteries required by EVs in a quantity that would satisfy the Administration’s goals. This forces dependence on China, our chief foreign adversary.
  • The mining of those resources is destructive to the environment. Much of it is done in China due to the country’s abundance of rare earth minerals, but wherever the mining occurs, it relies heavily on diesel power.
  • Joel Kotkin points out that China now hosts the world’s largest EV producer, BYD. Biden’s mandates might very well allow China to dominate the U.S. auto market, even as its own CO2 emissions are soaring,,
  • Producers of EVs earn carbon credits for each vehicle sold, which they can sell to other auto producers who fall short of their required mix of EVs in total production. Tesla, for example, earned revenue of $1.8 billion from carbon credit sales in 2022. But note again that these so-called zero-emission vehicles use electricity generated with an average of 60% fossil fuels. Thus, the scheme is largely a sham.

The push for EVs has been hampered by the botched rollout of (non-Tesla) charging stations under a huge Biden initiative in the Infrastructure Investment and Jobs Act. Progress has been bogged down by sheer complexity and expense, including the cost of bringing adequate power supplies to the chargers as well as the difficulty of meeting contracting requirements and operating standards. This is exemplary of the failures that usually await government efforts to engineer outcomes contrary to market forces.

Electric Everything?

Like EVs, electric stoves have drawbacks that limit their popularity, including price and the nature of the heat needed for quality food preparation. In addition to autos and stoves, wholesale electrification would require the replacement or costly reconfiguration of a huge stock of business and household capital that is now powered by fossil fuels, like gas furnaces, tractors, chain saws, and many other tools and appliances. This set of legacy investment choices was guided by market prices that reflect the scarcity and efficiency of the resources, yet government industrial planners propose to lay much of it to waste.

Central Planning: a False Conceit

John Mozena quotes Adam Smith on the social and economic hazards of rejecting the market mechanism and instead accepting governmental authority over the allocation of resources:

“All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.”

And Arnold Kling gives emphasis to the disadvantages faced by even the most benevolent central planner:

“As Ludwig von Mises and Friedrich Hayek pointed out during the socialist calculation debate, central planners lack the information that is produced by markets. By over-riding market prices and substituting their own judgment, regulators incur the same loss of information.”

Advocates of EV industrial policy have failed to appreciate the large gaps between the technology they are determined to dictate and basic consumer requirements. These gaps are along such margins as range, charging time, tire and battery wear, and perhaps most importantly, affordability. The planners have failed to foresee the massive demands on the power grid of a forced replacement of the internal combustion auto stock with EVs. The planners elide the true nature of EV-driven emissions, which are never zero carbon but instead depend on the mix of power sources used to charge EV batteries. Finally, EV mandates show that the industrial planners are oblivious to other environmental burdens inherent in EVs, whatever their true carbon footprint might be.

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Markets and Mobility

25 Thursday May 2017

Posted by in Markets, Poverty

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Government aid programs tend to perform poorly, especially in developmental terms. In the U.S., anti-poverty programs keep the poor running in place, at best. Yes, they provide minimal income, but they seldom offer a way out and usually discourage it. Moreover, the administration of such programs diverts a significant share of funds to well-heeled civil servants and away from the intended recipients. Foreign aid programs are probably even worse, functioning as catch basins for funding corrupt officials. Progressives, in particular, persist in taking the paternalistic view that we must rely on government action to “care for” and “protect” the poor, able or not. Markets, on the other hand, are held to offer no promise in fighting poverty. In fact, the general assumption made by the progressive left is that markets exploit them.

The truth is that markets offer great promise for encouraging economic mobility. Arnold Kling offers a good conceptual construct in a recent post: while humans are often subject to irrational tendencies in their assessment of choices, their interactions in markets offer a way of smoothing irregularities and disparate bits of information, providing useful signals about the availability of resources and demands for their use. The result is a flow of information that best signals opportunity. Kling calls the process of market interactions the “collective mind”. Rather than encouraging individuals to fully participate in effective markets, free of intervention, we instead deny them the best opportunities for gain. The notion that the poor must be “protected” from markets is embedded in policies like wage and price controls, benefit mandates, overtime rules, drug laws, occupational licensing, and innumerable other harmful regulations. The poor should have the unfettered ability to avail themselves of the social efficiencies of Kling’s collective mind.

Last Thursday, Don Beaudroux’s “Quotation of the Day” was taken from an essay by Ludwig von Mises in which he characterized private property in a market economy as “property by consumer consensus”. In other words, consumers reward sellers who create value, and those rewards accumulate in the form of private property. Likewise, consumers punish poor performance, which has a cumulative negative impact on one’s ability to accumulate or hold onto private property. The benefits conferred by consumer preference do not stop with the owners of the firm. Others productively affiliated with the firm also reap gains in rewards, allowing them to accumulate private property. And of course, consumers are the beneficiaries in the first place: in their judgement the firm delivers value in excess of price. The key here is that free market rewards and penalties are deserved and based on productivity in meeting desires, and only the market can distribute property so efficiently. The able poor can certainly add value and thereby accumulate property, if only given the opportunity.

Jeffrey Tucker has stated that “Only Markets Can Win the War on Poverty” (ellipses are my edits):

“The default state of the world is grueling poverty, universal insecurity, and short lives. When governments do come along, they nearly always serve themselves first. … Capitalism made huge progress toward the conquest of poverty. For the first time in history, the productive resources of society turned from serving mainly the elites toward serving the common person. This change alone began to flip the power narrative of social evolution.

And this revolution continued for two some two-hundred years, during which time the average life span expanded dramatically, infant mortality collapsed, incomes rose, and the great project of universal ennoblement achieved an unprecedented boost. And this trend continues today wherever markets are given freedom to function, property rights are secure, and people can associate and trade without molestation by the elites. … In short, capitalism made huge progress toward the conquest of poverty.“

Markets are not harmful to the poor. To the contrary, as Tucker says, they have helped lift billions out of poverty around the globe. But government increasingly plays the role of big provider and arbiter of what can and can’t be traded, by whom, and at what price. The suspension of the market mechanism by this process denies the poor the opportunities made possible via participation in free markets, whereby Kling’s “collective mind” processes massive quantities of information and acts upon it spontaneously. But the “collective mind” concept, as a description of market interactions, is too simple: we know that individuals act on the signals provided by the market and are rewarded based on how effectively they do so. There is no doubt that the poor can do that too. It’s time to cast aside the paternalistic and destructive notion that the able poor must be insulated from markets.

Is The Patent a Perversion?

28 Tuesday Apr 2015

Posted by in Property Rights

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money-tree-patent-cartoon

No one likes a monopoly except the monopolist, and a monopoly granted by patent is generally no exception. Patents are intended to be temporary, but they are often extended, at high cost to customers, beyond what many consider necessary as an incentive for innovation. There is also doubt about the validity of many “innovations” on which patents are issued. Alex Tabarrok once posted this cute illustration on the excesses of patent law. He has also discussed the existence of “patent thickets”, situations in which “a new product can require the use of hundreds or even thousands of previous patents, giving each patent owner veto-power over innovation“, or at least a way to skim some of the profits. Such thickets serve as a detriment to innovation, contribute to excessive litigation, and ultimately defeat the purpose of rewarding an innovator. Patent “trolls”, who threaten litigation over patent issues but may not own any patents themselves, have become a growing problem. In many ways, intellectual property laws begin to look like a rent-seeker’s playground. James Pethokoukas blogged late last year about a new study by the Congressional Budget Office stating that the U.S. patent system had “weakened the linkage between patenting and innovation“.

There is strong disagreement among libertarians about the validity of intellectual property rights (IP — copyrights, trademarks and patents). My natural sympathies are with the individual who rightfully seeks to benefit from their own creativity and hard work, but whether an innovator should enjoy a state-enforced monopoly on any and all applications of an idea is another matter. If potential competitors, customers and society have an obligation to this individual, some would insist that it is merely an ethical obligation, not one that should be sanctioned by the state.

In what follows, I will mostly refer to generic “ideas”, with the caveat that there are important distinctions between patents, trademarks and copyrights. I do not mean to minimize those distinctions. Rather, my interest lies in the general notion of intellectual property and any fundamental rights that successful “ideation” should confer. I confess that I have a bias in favor of rewarding innovators, but that might be a mere mental remnant of our legacy of IP protection in the U.S.

Suppose that some person, Mr. I, has an idea, and it is the first of its kind. Should Mr. I be granted an exclusive right to the idea and a monopoly on its application? Two qualities of tangible property are thought to be helpful in thinking about this kind of problem: rivalrousness and exclusivity. Rivalrous benefits make sharing difficult and make a thing more suitable as private property. Exclusivity means that others can be restricted from enjoying the benefits. If ideas had these qualities, then possession of an idea would settle the issue of rights without the need for special recognition of IP by government.

Pure public goods like air are non-rivalrous. Ideas themselves are often said to be non-rivalrous, but what is done with them might produce rivalrous benefits. If the benefits of Mr. I’s idea can be enjoyed by one individual without diminishing the benefits to others, then the idea is non-rivalrous.

Exclusivity is a closely-related but separate concept meaning that the benefits can be enjoyed privately, to the exclusion of others. Pure public goods lack both rivalrousness and exclusivity. On the other hand, a painting can be owned and kept in a private home, thus making it exclusive despite the fact that its benefits are largely non-rivalrous; though multiple individuals can enjoy a film simultaneously (non-rivalrous), it can be screened in a private venue charging admission; and while software can be shared, it is possible to achieve a measure of exclusivity by limiting the media (and replicability) through which it is available. However, the idea underlying a productive machine or process may be exclusive only to the extent that it cannot be discovered or reverse-engineered. While a new machine may be purchased from Mr. I and then owned and used exclusively, the idea itself has only limited exclusivity.

To strip the problem down to bare essentials, suppose there are no frictions in the transmission of information and that if Mr. I makes any practical use of his idea, or even mentions it to someone else, then the idea will be immediately known to all others. The idea itself is non-rivalrous and non-exclusive. There could still be gains to marketing applications if there are production costs involved (as that discourages entry), and those gains are rivalrous if the number of potential buyers is limited. To slightly rephrase the original question: Should Mr. I be granted, by the power of the state, an exclusive right and a monopoly on applications of his idea? A brilliant idea may have a rivalrous dimension and its benefits may be exclusive, but any non-exclusivity of the idea itself will diminish its market value. Does that offer sufficient grounds for the existence of IP?

This was essentially Eugene Volokh’s position when he asserted, in 2003, that a non-rivalrous good (water from the water table) has a market value, like any piece of tangible property, as long as it is possible to exclude others from access (to a well). (But that was not Volokh’s main argument in support of IP — see below.) Lawrence Solum at Legal Theory Blog took issue with Volokh’s position on valuation, insisting that it is often impossible to price IP optimally and therefore it is not like tangible property. Here is Volokh’s brief rejoinder, which rests partly on the argument discussed in the next paragraph.

A standard defense for IP is that rewarding invention and creativity enhances incentives for “great works” and technological advance. This was Volokh’s main defense of IP. Many libertarians find this hard to swallow, however. First, they insist that creative action is often driven by non-pecuniary motives. Nevertheless, art and invention are facilitated by funding, so the existence of IP rights may help to secure that support. A second objection is that ideas are frequently not unique; there are many examples of near-simultaneous discoveries. So, as this objection goes, if A hadn’t thought of it, B would have, and the incentive is often unnecessary. That is anything but absolute, however.

A very libertarian argument against property rights for ideas is that defining such a right infringes on the property rights of others. That is, any law restricting the use of an idea by others necessarily prevents them from using their own resources in a particular way. It therefore represents a kind of taking. This post by Stephan Kinsella at the Mises Daily stakes out this position:

“Patents grant rights in ‘inventions’ — useful machines or processes. They are grants by the state that permit the patentee to use the state’s court system to prohibit others from using their own property in certain ways — from reconfiguring their property according to a certain pattern or design described in the patent, or from using their property (including their own bodies) in a certain sequence of steps described in the patent.

In both cases, the state is assigning to A a right to control B’s property: A can tell B not to do certain things with it. Since ownership is the right to control, IP grants to A co-ownership of B’s property.“

Kinsella’s view is that creation, in and of itself, does not imply ownership. It is a transformation of resources, but ultimately the owner of those resources must own the creation. My difficulty with this argument is that an idea, if previously unknown to anyone, has no necessary impact on a prior use of resources owned by others. The ex ante value of those resources is based on their prior use, and that use can be continued. Certainly, if the new idea implies that the prior use is no longer the best use of those resources, then an patent-like restriction on the use of the new idea represents a harm. For example, if the new idea reduces production costs and an established competitor is restricted from using the idea, they will be harmed. Nevertheless, I hesitate to call this a “taking” because there is no restriction on the prior use.

Roderick T. Long makes the same argument as Kinsella in “The Libertarian Case Against Intellectual Property Rights“:

“... information is not a concrete thing an individual can control; it is a universal, existing in other people’s minds and other people’s property, and over these the originator has no legitimate sovereignty. You cannot own information without owning other people.“

Long makes the further claim that ownership of inventions embodying IP is not legitimate because one cannot own a “law of nature”:

“Defenders of patents claim that patent laws protect ownership only of inventions, not of discoveries. (Likewise, defenders of copyright claim that copyright laws protect only implementations of ideas, not the ideas themselves.) But this distinction is an artificial one. Laws of nature come in varying degrees of generality and specificity; if it is a law of nature that copper conducts electricity, it is no less a law of nature that this much copper, arranged in this configuration, with these other materials arranged so, makes a workable battery.“

I find this view preposterous. Nature exists apart from our ability to exploit it. A new piece of knowledge or practical technique is not itself a “law of nature”. It is a discovery about the laws of nature.

Here are Arnold Kling’s thoughts on these and other IP posts, including this short piece from Daniel Drezner, who discusses the importance of credible commitment in protecting rights. A credible commitment does not exist when ex ante assertions of IP protection prove to be malleable ex post, under pressure from critics pointing to the larger gains of rescinding those protections.

I was motivated to write about IP after reading a post by Jeffrey Tucker at the Beautiful Anarchy blog, who wrote about the severe handicaps imposed by government regulation on society. In that post, he briefly disparaged IP. Tucker noted the spooky similarity of the present regulatory environment to Ayn Rand’s novel Anthem. I agree, but there is some irony in this, as Rand herself was a strong supporter of IP rights. Here is what Tucker said about IP:

“Through intellectual property laws, the state literally assigned ownership to ideas that are the source of innovation, thereby restricting them and entangling entrepreneurs in endless litigation and confusion. Products are kept off the market. Firms that would come into existence do not. Profits that would be earned never appear. Intellectual property has institutionalized slow growth and landed the economy in a thicket of absurdity.“

The nation’s founders certainly wished to recognize IP rights, but only within limits. The so-called Copyright Clause in Article I of the U.S. Constitution empowers Congress:

“To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

So, like it or not, IP is recognized in the Constitution. The libertarian arguments against IP are persuasive in some respects, but I am not wholly convinced of their wisdom in terms of promoting innovation and economic growth. However, I am persuaded that shorter patent duration and severe limits on extensions would reward innovators and offer them incentives without the loss of growth implied by a long-term grant of monopoly. And this sort of modification might encourage more efforts to handle IP contractually, a topic that is discussed in detail (and with skepticism) in the post linked above from Long. There may be benefits as well to defining a higher threshold as to patentable ideas. For example, some say that only discoveries, not mere innovations, should be granted patents. “Mere” innovators could still capture gains via first-mover advantage and their own branding efforts, but not via patents.

Government’s Siren Song of Mortgage Risk

19 Friday Dec 2014

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What’s not to like about cheap, easy housing credit? It would be hard to criticize if it developed in response to real risks and rewards in a free market, devoid of interference by public authorities. Lenders with their own capital at risk tend to keep their pencils sharp when assessing collateral and borrower repayment capacity; borrowers respond to rate incentives by adjusting the timing of their consumption and their borrowing demands. This helps keep the extension of credit at manageable levels relative to earning power, and discourages destructive boom and bust cycles in housing prices. Conceivably, such arrangements could give rise to a more stable and prosperous economy with relatively, realistically easy credit as a by-product. If so, I’m all for it.

Unfortunately, that is not the sort of housing finance market we have in the U.S. In particular, bank lending often carries little real risk to anyone but taxpayers. Depositors who fund bank lending are almost always 100% federally-insured. As for bank capital, large institutions may be rational to regard themselves as too-big-to-fail, meaning that federal authorities will come forward with bailout money should they fall on hard times. Borrowers are encouraged by mortgage agency buyers (Fannie Mae and Freddie Mac) whose implicit federal guarantees reduce the nominal cost of borrowing, and whose standards of credit quality tend to move procyclically. Borrowers are subsidized by the tax deductibility of interest costs. Bankruptcy laws and foreclosure rules make collecting on bad debts more difficult. Finally, there is always pressure on lenders to engage proactively in high-risk community lending.

When risks are meaningless to market participants and rewards are inflated, the normal self-regulatory function of the market is suspended. Who cares about mistakes when you don’t have to pay the consequences? But society ultimately pays in misallocated resources, higher taxes and unstable markets. And while the costs to lenders and borrowers are blunted, most don’t get off scot-free: other consequences may include falling housing prices, widespread personal bankruptcies and damaged credit, foreclosures, stricter regulatory oversight, and a prolonged follow-on episode of hard credit.

The expansion of credit leading up to the housing crisis was marked by the rise of non-traditional mortgage products, which typically involve risky collateral and borrowers with tenuous credit. Interest-only mortgages reduce the borrower’s monthly payments, but the borrower fails to build their equity cushion over time. Payment option adjustable rate mortgages (ARMs) can be criticized on the same grounds, except they are arguably worse. Subprime mortgages are characterized by high loan-to-value ratios and tend to be marketed to borrowers with less than stellar credit histories.

Arnold Kling reviews a new book by Peter Wallison on the role of “non-traditional” mortgages in the financial crisis. Wallison highlights the culpability of government in encouraging the subprime lending boom, especially Fannie and Freddie. He also points to the failure of government to institute real reforms to prevent the recurrence of such a crisis:

“Congress mandated regulation of practices that played no role in the crisis, either because legislators wanted to mislead the public or were themselves misled. Meanwhile, they did not confront the issue of what do about Freddie Mac and Fannie Mae, and they left the door open for the return of nontraditional mortgages. Indeed, Melvin L. Watt, the recently appointed regulator of Freddie Mac and Fannie Mae, is once again calling for the loosening of underwriting standards.”

The drift back to risky lending is underway. Dodd-Frank will not stop it or end “too-big-to-fail” risk-taking and cronyism. The best advice to potential borrowers is to emphasize adverse personal and economic scenarios when evaluating a loan offer, and try to resist the temptation to over-invest in housing. AS voters, we  should demand an end to destructive government intervention in housing markets and home lending.

Gender Wage-Arbitrage Makes Me Happy

27 Saturday Sep 2014

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Should we condemn a man who hires a disproportionate number of women for his tech firm because “they are cheaper”? Or should he be praised for offering those women opportunities in a field in which they are severely under-represented? More likely the latter, and I’m not even sure he deserves criticism for thumping his chest about it in a talk he gave at a startup conference. Alex Tabarrok ponders this employer’s hiring practices, noting that he angered some women in the audience and on Twitter. But Tabarrok objects:

“Women’s wages aren’t pushed down by employers who hire women but by employers who don’t hire women. So why does Thornley [the CEO] get the blame?”

Tabarrok blames the negative reaction on a phenomenon that Arnold Kling calls the  “intention heuristic.” This is an often misleading, judgmental rule-of-thumb that gives the benefit of any doubt to good intentions, and casts suspicion on actions taken in self-interest. This presumption is quite common among my friends and certainly in the media. Tabarrok goes on to say (about the CEO):

“…[He] has overcome prejudice (his or his society’s), recognized the truth of equality and taken entrepreneurial action to do well while doing good. It’s Thornley who is broadcasting the fact of equality to the world and encouraging others to do likewise.”

Maybe, but absent the fanfare, Thornly is simply responding to incentives, doing what a good capitalist ought. The response of resources to incentives is a major virtue of capitalism.

What a Joy To Be a Social Scientist With ESSP

09 Wednesday Jul 2014

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The world of social phenomena is so complex that we should be guarded in accepting appeals to scientism. As Arnold Kling points out, social scientism is insidious because it may appear to comport with “common sense,” yet this frequently involves a fallacy of division. Kling believes we should do our best to exercise “ESSP,” or Epistemological Skepticism about Social Phenomena. The egos of central planners are fed by social scientism of the type described by Kling, but their promises regularly fail to pan out, leading to a kind of societal senescence. But if we all rev up our ESSP, and keep are meddling hands off, we’re likely to enjoy a more creative and prosperous society. Let freedom ring!

Is Community Service So Praiseworthy?

05 Thursday Jun 2014

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Community service is always praised as an honorable activity, at least when it isn’t assigned in court, but should it be given extra emphasis by schools in admission decisions? Should schools (or society) expect some minimum level of community service of college applicants (or anyone)? Should it be viewed as experientially or ethically superior to time spent developing one’s talents? Time spent gaining job experience? Time spent earning income? Arnold Kling takes a hard line on this question, arguing that community service deserves no more praise than other endeavors. He believes the topic is worthy of a high school graduation speech.

One commenter on Kling’s post noted that Milton Friedman once asked William Buckley (who advocated national service) whether cleaning the toilet in a public school does more to serve the community than cleaning the toilet in a McDonalds. I’m inclined to agree with Kling that there are many activities that have at least as much value as community service. He says:

“If you judge people by how their life’s work contributed to better lives for people and less poverty in the world, then I will gladly stack up the Henry Fords and Thomas Edisons against the Mother Theresas. Collectively, the capitalists and entrepreneurs have a much better claim on our gratitude than do the icons of community service.”

But I also assert that it all depends on the nature of the activity, which should be self-evident. Community service might also reflect on the breadth of an individual’s experiences, or their “well-roundedness.” Still, even “having fun” has value, sometimes great value. If you like your work, your productivity and enjoyment count for a lot. Like Kling, I have strong reservations about conferring special status to time spent doing community service activity. It can be good or it can be of less value than other choices. It can even be a fraud.