Individual Mandate 101

The Washington Post has a piece that explains the individual mandate.  Unfortunately, I think the explanation must be incorrect.  Here is the reason given for the mandate: 

Where the policy came from: The individual insurance mandate was the brainchild of conservative economists, as a way to address “free-riding” in healthcare without going all the way to a single-payer system.

The conceptual problem here is the assertion that the mandate is about fixing the problems associated with free-riding behavior.

The reason I think this must be incorrect is because free-rider behavior is one of the reasons for concluding that a public good is a source of market failure.  A public good has two characteristics: (1) nonrivalry in consumption and (2) nonexcludability.  Health care is both rival (we each consume our own units of health care) and excludable (a person can be physically excluded).  Health care goods and services are private goods, not public goods.  Private goods do not have the free-rider problem.

The problem of adverse selection with respect to insurance is really what the mandate is supposed to be about.  The problem of adverse selection is seen in recognizing that individuals at greatest risk will be more likely to seek to purchase insurance than will individuals at least risk.  A business trying to earn a profit by supplying the ability of others to pool risk may find that it is difficult to do this without having a risk pool with both high risk and low risk individuals.  The consequence may be that insurance businesses offer insurance at premiums that many of the people facing higher risks find too expensive, and perhaps the market will fail to supply efficient risk pooling.  This also suggests a sort of vicious circle.  When the insurance businesses discover the need to increase premiums this will also decrease the incentives for low risk individuals to think insurance is worth the price.  If so, then even fewer low risk individuals will choose to pool risk by purchasing the insurance.  The policy answer that is typically suggested is to force both low risk and high risk individuals to be in the insurance risk pool.

I suspect the idea that adverse selection is a market failure is incorrect.  The reason is that I suspect the conceptual analysis of adverse selection assumes knowledge that no one can know.  We cannot know, given that people differ with respect to their preferences to accept risk, which people would be willing to pay for insurance at the efficient price.  Surely it cannot be efficient to force everyone into the risk pool.  For efficiency we would have to be able to identify which individuals would choose to join the efficient risk pool. This we cannot know in practice, even though we can certainly do conceptual analysis assuming we actually know all the relevant information.

This also suggests, it seems to me, that the insurance mandate in the ACA does not fit the conceptual efficiency concerns found in the model of adverse selection.  After all, this mandate compels all individuals to purchase insurance, and there is no effort to discover the efficient risk pool.

My last comment on the quotation above is about the idea of a "conservative economist."  I wonder what the definition of "conservative economist" is?  Most of the economic analysis of public policy these days relies on the normative framework of pareto optimality, a.k.a. efficiency.  It seems to me that economists of all political stripes do efficiency analysis.  Both free rider behavior and adverse selection come from efficiency analysis, and thus I'm thinking an economist is an economist.  If it makes sense to refer to a "conservative" or a "liberal" economist, then I think it is likely that economist is acting politically and not as an economist.

ACA Oral Argument

There were many interesting things said in oral argument before the Supreme Court yesterday with respect  to whether or not the Affordable Care Act (ACA), a.k.a. Obamacare, is constitutional.  At issue is whether the enumerated constitutional power of Congress to regulate interstate commerce includes the power to compel a person to purchase health insurance.

Very early on Justice Kennedy asked the Soliciter General, who was arguing in support of the constitutionality of the health insurance mandate, the following question: "Can you create commerce in order to regulate it?"  The answer was: "That's not what's going on here, Justice Kennedy, and we're not  seeking to defend the law on that basis."

I wish Justice Kennedy had asked his question in the following way: "Can Congress compel commerce in order to regulate it?"  I think this is a better, more precise, way to put the key constitutional question with respect to the health insurance mandate.  The action of Congress is actually not to "create," it is to compel many individuals to do something they would not choose to do on their own volition.  It seems to me that the constitutional power of Congress is the power to regulate voluntary exchanges between a buyer and a seller located in different states.  It seems obvious that the power to regulate exchanges (commerce) cannot include the power to compel exchanges.

Of course, Justice Kennedy's question seems very close to my question, but I think that there are many potentially different implications that follow from using "create" rather than "compel."  I suggest that using "create" makes the action of Congress seem much more benign than it truly is.  A definition of "create" at dictionay.com suggests the Justice was asking: "Can you cause commerce to come into being in order to regulate it?"  Certainly, put in this way, the action by Congress under Court review seems almost a good thing.  After all, "creation" is generally a good thing, and in the realm of economic affairs it seems to be generally accepted that more economic activity is better than less.

So, I fear, that asking the question in the way Justice Kennedy did, makes it conceptually pretty easy to decide the answer is yes.  After all, if the action of Congress is to create commerce that is "good for everyone" then it could seem to make sense for Congress to create commerce in order to regulate it.

However, we should conclude that Congress cannot create commerce.  Congress might participate in commerce, but it cannot create commerce.  Searching online dictionaries provide a couple of useful definitions of "commerce" in this regard:

an interchange of goods or commodities

the buying and selling of goods.

These definitions suggest that my definition of interstate commerce, i.e., a buyer and a seller located in different states, is on target.  It also suggests that we should not think that commerce is created.  Commerce emerges through the voluntary actions of different individuals. Commerce is not created by the actions of either a buyer or a seller alone.  Commerce emerges from the actions of a buyer and seller in an interaction between the voluntary actions of each.

Consider that Congress can engage in commerce by being either a buyer or a seller, but of course it cannot be both buyer and seller.  What would we say if Congress attempted to "create" commerce by either (a) telling a person she must buy something from the US Government, or (b) telling a person she must sell something to the US Government?  On the surface either (a) or (b) might appear to be commerce because we could observe a "buyer" and a "seller," but neither would be commerce.  Both (a) and (b) involve an action by Congress to compel either a buyer or a seller to act as the government commands.  Congress cannot "create" commerce, or create an exchange between a buyer and a seller without using force to compel one or the other individual, or perhaps even both, to act in a way that would not otherwise be chosen for themselves.

I suggest the appropriate question to evaluate the constitutionality of the health insurance mandate in the ACA is: Does Congress have the power to compel a person to purchase something she would not otherwise purchase?  The answer, of course, is NO.

Police Power & The Health Care Mandate

Yesterday I wrote about the interstate commerce clause which grants Congress the constitutional power to regulate interstate commerce. My analysis did not involve the way the Supreme Court has come to understand the interstate commerce power over time. I think any citizen should be able to read his or her Constitution and have a chance to understand what Congress has the power to do and what it does not have the power to do.

Unfortunately, the constitutional jurisprudence of the Supreme Court has, over time, allowed Congress to regulate almost any (and every) aspect of economic activity. It is as though the Court has amended the words of the interstate commerce clause. In order to understand the Constitution these days, a citizen probably will have to become an expert in Supreme Court opinions.

If according to past Court opinions Congress has the power to regulate almost any aspect of economic activity, is it possible within this body of Court opinions to conclude the health insurance mandate is unconstitutional?

I listened to an interview of one of the attorneys in the case on a morning radio show. Apparently, it is thought that a fundamental conceptual way to decide that the health insurance mandate is unconstitutional is not to directly confront the enumerated commerce power, but instead to consider the meaning of the police power which is supposed to be a power reserved to the states by the 10th Amendment.

This police power contention may have some relevance but I think it is likely to rely on an incomplete understanding of the meaning of the police power.

Let's take it for granted that in fact the police power is a power reserved for state governments and that Congress does not have police power. The way in which this fact might be related to the question of the health insurance mandate is to consider the attributes of the police power. Specifically, the police power is a power that applies to every individual. For example, murder is prohibited by state governments constitutionally through the police power. Any person who commits murder has committed a crime. Every person is prohibited, by the police power of state government, from murdering another. There is no exception. 

How might this aspect of police power be related to the health insurance mandate? The mandate requires every person to have health insurance. This attribute of the mandate is an attribute of the police power, not an attribute of the commerce power. The idea of the commerce power is that, as I wrote yesterday, Congress has the power to regulate exchanges between people. If a person chooses not to engage in a regulated exchange, then the power of Congress cannot reach that person. If Congress regulates commerce in wheat, then a person who does not touch wheat cannot be subject to the regulation. The health insurance mandate is applied to persons regardless of their choices or their actions. This is an aspect of police power, not the commerce power.

This makes some sense to me because it is a conceptual idea that suggests that Congress cannot compel a person to engage in an exchange so that Congress can then regulate the person's exchange that it forced. If this action by Congress is allowed as a part of the constitutional power to regulate interstate commerce, then indeed any aspect of a person's life would seem subject to regulation by Congress.

However, the police power, properly defined, has another important attribute. The police power is the power to prohibit. The police power involves the power of government being used to prohibit actions by people that will harm the person or property of another. Consider various crimes such as murder, theft, assault. Each of these is an action that government prohibits under the police power, and each of these involve actions by a person that harms the person or property of another. So police power has at least two attributes. One is that it applies to every person, and the second is that it prohibits actions that harm the person or property of another.

The health insurance mandate involves Congress asserting it has the power, not to prohibit harm to another, but to compel a person to help another. It seems to me that whether this power to compel applies to everyone or not, it cannot be, properly defined, a power that resides within the police power. So, I suspect this path to arguing that the mandate is unconstitutional will not work with the Court.

It seems that the Court has yet to confront the question of whether Congress has the power to compel commerce under the interstate commerce clause. It seems to me the best approach to this issue is to indeed say the Court has not confronted the question in the past, and therefore, there are no Court opinions that provide a precedent the members of the Court might feel they must follow in deciding this issue.

Perhaps there is an idea from the first commerce clause opinion, penned by Chief Justice Marshall, that justices today might find of central importance. Justice Marshall wrote that however interstate commerce is defined it cannot be defined in a way that implies there is nothing Congress cannot regulate. The insurance mandate, if declared constitutional, would imply there is nothing Congress cannot regulate in our lives. While it seems to me that many members of Congress, and many of those who have been our Presidents, already believe there is nothing in our lives that cannot be constitutionally regulated by Congress, I think the very idea of our Constitution would be voided by such an opinion by the Supreme Court.

It seems to me the constitutional issues in the health insurance mandate should be simple. The Court should opine that regulating commerce, by definition, means regulating exchanges that people voluntarily choose to engage in. Congress does not have the constitutional power to compel commerce because the action by Congress to compel is not, be definition, the same thing as the action by Congress to regulate.

On Advocating Interventionism

Ludwig von Mises:

With a few exceptions contemporary commentators on economic problems are advocating economic intervention. This unanimity does not necessarily mean that they approve of interventionistic measures by government or other coercive powers. Authors of economics books, essays, articles, and political platforms demand interventionistic measures before they are taken, but once they have been imposed no one likes them. Then everyone--usually even the authorities responsible for them--call them insufficient and unsatisfactory. Generally the demand then arises for the replacement of unsatisfactory interventions by other, more suitable measures. And once the new demands have been met, the same scenario begins all over again. The universal desire for the interventionist system is matched by the rejection of all concrete measures of the interventionist policy. (A Critique of Interventionism, p. 33)

Interstate Commerce & the Health Insurance Mandate

Today the Supreme Court begins three days of oral argument with respect to judging the constitutionality of the Affordable Care Act (ACA), which is often referred to as either "health care reform" or "Obamacare." The Constitution is conceptually constructed on the idea of "we the people" granting specific powers to Congress by writing a list of "enumerated powers" in Article 1, Section 8 of the Constitution. Congress is supposed to have only the powers that are specifically enumerated, and when Congress creates a statute that falls outside the enumerated powers such a statute is supposed to be declared to not be law.

Thus, a key issue before the Supreme Court is whether or not the Constitution includes an enumerated power by which members of Congress (along with the President who also swears an oath to protect and defend the Constitution) have the power to create various statutory provisions in the ACA. Specifically, the question is whether Congress has the enumerated power to require every person to purchase government defined "minimum" health insurance coverage.

It is clear that such a power is not directly enumerated in the Constitution. The Congress may still have the power to act as it has in the ACA if the power to require the purchase of insurance can be said to fall within one of the enumerated powers. Congress and the President have asserted that the power does in fact fall within the enumerated power to regulate interstate commerce. Here is the relevant constitutional text:

The Congress shall have Power . . . . To regulate Commerce . . . among the several States . . . .

Notice that the words in the Constitution do not say "Congress shall have the power to regulate interstate commerce." However, I do think "interstate commerce" is a good modern statement of the meaning of the words "among the several states."

Does this enumerated power mean that Congress has the power to compel a person to purchase health insurance with certain "minimum" coverage? Former Senator Tom Daschle says yes:

"From both a legal and practical perspective, the choice is clear. Congress was well within its authority in passing the individual mandate to regulate the interstate effects of an industry that is almost 20 percent of our nation’s economy— more than $2.5 trillion each year."

It seems to me Mr. Daschle must think the interstate commerce clause of the Constitution is: Congress shall have the power to regulate economic activity. In addition, Mr. Daschle must think that the word "regulate" includes the meaning of the word "mandate." Mr. Daschle is not alone in this view of the interstate commerce clause, and many decades of Supreme Court constitutional jurisprudence has, at times, come very close to explicitly writing just what Mr. Daschle writes in this quote. So, if your reading of the Constitutional text suggests to you that Congress does not have the power to compel a person to purchase anything, not even health insurance, don't be quick to assume that the Supreme Court will say the Congress does not have this power.

In my view, such conclusions about the meaning of the interstate commerce clause amount to the Court's constitutional jurisprudence having essentially amended the Constitution to say something like: Congress shall have the power regulate, compel and prohibit economic activity. Well, maybe the Court hasn't yet said that Congress has the power to compel economic activity, but if it decides that the health insurance mandate is constitutional, then I suggest the Court's own copy of the Constitution must read as I suggest.

What does the power to regulate interstate commerce mean? First, I suggest commerce means an exchange between two persons, one being the buyer and the other the seller. Commerce does not mean any and all economic activity. For example, commerce does not include production activities (and the Court said this was so for many, many years, but not often now). Second, interstate commerce would mean an exchange such that the buyer is in one state and the seller is in another state. It does not mean an exchange between a buyer and a seller in the same state (and the Court said this for many years, but not so much now). Third, regulate means to specify rules, not to compel or to prohibit. It doesn't make sense to specify rules for commerce, or for exchanges, when there are no exchanges, regardless of whether there are no exchanges because there are people who do not want to exchange or there are people who want to exchange that have been prohibited from doing so because of government's prohibition (and the Court has said this at times with respect to prohibition).

Therefore, it seems to me that Congress has the constitutional power to specify rules for the interactions between a buyer and a seller who are located in different states.

Contrary to Mr. Daschle's apparent view of the Constitution, Congress does not have the power to regulate or to compel any economic activity just because such activity, in aggregate, can be said to involve a big number for the money that changes hands in all exchanges combined. There can be only exchanges by persons in one state that when accounted for in aggregate involve a large dollar figure.

The Court should say the Congress has the power to specify rules by which a buyer in one state and a seller in another state will exchange money for a health insurance contract. The Court should also say that this is the extent of the constitutional power of Congress with respect to health insurance. Of course, many today will say this limits Congress far too much. Such an understanding of the Constitution does indeed imply a Congress, and a President, with little power to intervene in our economic affairs. But, this is what the words in the Constitution actually say, and it is a view of limited government that the constitutional framers put before "we the people" to be ratified. If many today think the words in the Constitution should be different, then these words should be made different by a proper amending of the Constitution. After all, regardless of Court opinions, unless the words are amended, the words in the Constitution are still "The Congress shall have Power to regulate commerce among the states."