I'm Just a Bill

Obamacare has been surprisingly up held.  The Supreme Court's ruling is based on the idea that congress in allowed to tax under the constitution and thus the individual mandate is constitutional.  This means that if you chose not to purchase healthcare you will be stuck with a small fine, at first.  For the first two years of Obamacare there will be a fine much less than that of the actual cost to have a health insurance plan and then the fine goes up substantially.  What does this do?

This cheaper fine is not only for individuals, it is for businesses as well who will be required to provide health coverage.  The fact that a business can pay a small fine rather than provide health coverage to its employees creates an incentive to not provide health coverage at all.  Whether employers choose not to provide it to their employees is yet to be seen, of course, as an effect of Obamacare, but rather from the current recession.  Given the fact that we are in a recession it would make sense that employers will look for any incentive to keep their business afloat and choose not to provide health insurance but rather leave it up to the individual employee to acquire on their own.  I suspect many will choose to pay the fine as well because their healthcare was originally free but now must be paid for and it would only make sense that most would simply pay the fine because it is cheaper.  As soon as this begins to happen, the  Affordable Care Act is in full swing and the economic effects will begin to take place.  Health insurance providers will probably lower their prices for a short period as well to match the subsidized pricing.  However, this is not meant to last.  Competition will weed out the the firms that can't compete with the subsidized healthcare or the fine and as soon as that happens prices will start to climb again because less firms means more market power for each individual firm.  By this time, the fine will have been increased for those who chose not to purchase healthcare and if you notice, prices are now higher across the board.  This is obviously a generic outlook on the economic repercussions of Obamacare.  


Now, what we have is an oligopolistic market where a few large firms share most of the market.  I feel this will only amplify the wage gap that already exists in our economy which is ever so often brought up by the media and the occupy movement.  Now a few large firms can charge substantially higher prices to those top wage earning individuals and the government will just provide healthcare to the low wage earners.  Everyone is happy because they receive healthcare!  Woo Hoo!  The End right?  Not so fast.  Why are the top wage earners paying more?  Not only can they afford it but they will be paying for a better service.  This means they get care first and this is possible because it is a private firm that they have health insurance from.  Remember, fewer can afford it, so much fewer customers, and thus much shorter line meaning better and faster healthcare.  This concept of the rich getting richer and the poor getting poorer is unethical and capitalism at work according to today's rhetoric in the media but this is what you get with the Affordable Care Act.  Now those on subsidized care must wait.  This is the effect of one firm crowding out the rest of the market.  While everyone has access to the service, there is only one place to get it.  However, I'm sure we can be reassured by a hopeful message like, "great things come to those who wait."  Yeah, good luck with that. 
 

A Truly Affordable Act

The healthcare law is set to be ruled on in the next coming days.  The repercussions of this ruling could be massive if the law is struck down partially.  If the ruling on the mandate is that it is unconstitutional, it would not make sense to have any other part of the law upheld.  The Affordable Care Act is set to work on this premise which is why the healthcare industry has been preparing for its implementation in the last two years.  The economic repercussions of allowing MORE subsidized medicine will be substantial and, just like any service, must be paid for.  If the mandate, and the mandate only, is ruled unconstitutional then the ACA will have to be paid for by other means.  This may mean higher taxes across the board.  And even if the individual mandate is struck down by the Supreme Court that still leaves the business mandates which requires businesses with over 50 employees to provide health coverage. 

Clearly the ACA has many strings attached and if the main one is cut then we have nothing but a dysfunctional puppet trying to put on a show.  Insurance companies will be required to take on customers even if they have pre-existing conditions without charging extra, costing even more money which will in turn raise prices on those who can afford it to a point where they no longer can.  This will then force those individuals to take the subsidized healthcare which will in turn raise taxes even further.  Just the fact that insurance companies will have to cover anybody and everybody will send some out of business and cause prices to skyrocket forcing more people on subsidized care or to simply not have healthcare, since the mandate was struck down.  Thus, we are still in the same predicament we started in, if not worse.  

This law if put into effect will simply crowd out the private sector of healthcare.  It will put your health in the hands of politicians and not doctors.  

The best alternative I can see is to strike the entire law down and take a look at the policies already in place.  Some argue that regulating healthcare is regulating interstate commerce.  Even if healthcare is interstate commerce, health insurance is not.  Therefore the market for health insurance should be less regulated and allowed to cross state lines in order for competition to take place.  That is a truly AFFORDABLE and CARING ACT.

The Laffer Curve

In my last post I mentioned the underlying problem in the economy.  I feel like I should be clear on what I'm talking about here.  To start there is something called the Laffer Curve in economics.  This curve suggests an ideal rate of taxation by government and follows common economic laws for the business cycle.  It is shown below:
 

This curve shows the revenue for the government as it increases taxes.  The point of diminishing  returns to scale suggest incentives to work have decreased because taxes are so high.  Now, what does this have to do with the underlying economic problem?  Well, given the recent state of the economy one could suggest a shift in this curve.  I would certainly suggest that the optimal tax rate for maximum revenue would decrease in a recessing economy.  This notion however is countered by increased government spending during a recession through stimulus packages.  These stimulus packages are meant to keep spending at current levels by simply giving people and industries more money to sustain the "optimal" level of spending.  I put optimal in quotations because I don't feel there is an ideal universal level of spending for the private sector or public sector for that matter.  In order to maintain this level of spending that has generated economic growth in recent years stimulus packages are expected to trickle down and solve the economic crisis. 

We all live in this economy and have noticed very bleak improvements.  One of the reasons for some improvements is perhaps the system of government we have which separates state and federal responsibilities.  However, that is another blog post for another day.  The fact that the economy is in a state of decline is due to the idea that an increased amount of spending will always solve the problem.  It doesn't.  And simple economics shows us that there is a point of diminishing returns to all spending...as marginal cost increases it eventually hits a point where it increases exponentially and thus diminishing marginal returns come about.  These stimulus packages only allow to pay for the increasing marginal costs but do not increase marginal returns and in fact keep the economy in the area of diminishing marginal returns with no ability to correct and begin a new cycle.  

The attitude that spending will solve the problem can be traced back to the mortgage loans given to unqualified recipients.  It can also be seen in the increased government funding to education.  While education has not been the best in America, we have seen increased government spending with very little, if any, improvement.  And while state governments make cuts to education, that attitude shows it's ugly face again and demands MORE spending to fix the problem. 

What do we know about public education? I dont know.

This past weekend was the Texas GOP Convention.  Full of campaign rhetoric, and events from politicians from all over the state and nation from people like Ted Cruz, David Dewhurst and even Paul Ryan, the convention was not without drama.  While Ted Cruz seemed to own the crowd with overwhelming tea-party support, David Dewhurst, known as the establishment candidate, was actually booed when he attempted to paint his opponent as a Chinese supporting traitor.  Ted Cruz and Dewhurst are in a runoff for the senate seat formerly held by Kay Bailey Hutchinson.  This event happened on the heels of one of the biggest statement elections of the year, the Wisconsin Recall elections of Scott Walker(Governor of Wisconsin) and his supporting cast.  Walker and every one of the state legislators won their recall election in a huge landslide victory.  The victory marking a strong message to unions AND the education system across America.

These all were huge events of the past week, but, what I want to talk about is the education system in question in Wisconsin and Texas.  As most know, the Wisconsin recall event was in response to Walker's large budget cuts to state-funded teacher unions in the state of Wisconsin.  These teacher unions were asked to contribute more to their own pension funds by these cuts.  They were asked to contribute to their own insurance.  Now, the argument is that Scott Walker could have made cuts elsewhere besides public school funding, but is that true?  Let's take a look how school districts actually budget.  Well, that is actually tough to find.  When looking at local budgets it is tough to find any transparency on what schools actually spend their money on.  However, state and federal government funding is available.  State and government funding for public education has increased nationwide over the past decade with much of it coming through federal stimulus packages.  the stimulus packages were to be used to encourage reform in education but instead were used to prevent layoffs.  Given the current state of the economy, this is understandable.  Or does it speak to the underlying problem of the economy?  

Texas education funding, like Wisconsin, was also cut in the last legislative session.  According to politifact.com per-student spending was decreased by an average of  $500 per student in Texas.  This number was down from almost $8000 to just above $7000 a year per student.  This decrease in state funding must be due to the trend in the last decade for increased spending by individual school districts in Texas!  The graph below shows this trend.






  

In this graph we can see that education expenditures have greatly exceeded enrollment in the last decade by almost 5 to 1 according to this website http://fastexas.org/study/exec/spending.php

This trend begs the question:  Is another student in the classroom really five times more expensive than the previous amount?  Are the increasing marginal costs really that steep?

I only ask this question in response:  Every year, students in elementary school are required to bring new supplies to be shared by everybody in the class.  My question, what happens to all the scissors every year?

Oklahoma City Thunder’s Advantage

The NBA’s Oklahoma City Thunder has enjoyed an immense amount of success the last couple of years.  Making the NBA Western Conference Finals two years in a row, they have cemented themselves as the youngest and most promising team of the future for the Western Conference.  While the Thunder is a remarkable team, it is unusual that a pro sports team in such a small market (Oklahoma City, Oklahoma) would have so much success.  The common notion is that only large market teams have continued success while small market teams struggle to acquire the stars needed for consistent winning seasons.  I will attempt to show that the Oklahoma City Thunder is not actually in conflict with this notion. 

This notion has been consistent in the NBA since its’ founding in 1946 when the large market team Boston Celtics dominated the league in the 50s and 60s.  In fact, the two most successful teams in the history of the NBA have been the Boston Celtics and the LA Lakers.  Both of these teams are considered to be two of the biggest markets for professional basketball in the NBA.  It begins to make one wonder what has led to these dominant franchises in the last 60 years of NBA history.  One explanation is the invariance principle from the economics of sports research.  It states that certain types of players will always end up in the same places or on the same teams.  Generally speaking, star players will go to where their marginal revenue product (MRP) is greatest.  That is, players will end up where they can gain the most by playing a professional sport.  Thus, these large market teams of Boston and LA have been able to provide the largest benefit for a player’s MRP.  This leads to a payroll imbalance between large market and small market teams.  Essentially, because the large market teams earn more revenue they can afford players with a larger MRP than smaller markets.  A player’s marginal revenue product is what determines the cost for that player in terms of player salary.  The idea is that a better player will produce more on the field, or court in this case, and generate higher revenue for the franchise owner.  Given that most, if not all, owners’ bottom line to maximize profits there will be a definite revenue imbalance throughout the league because of the differential in market sizes.  Therefore, a payroll imbalance throughout the league ensues and thus there is competitive imbalance.   The payroll imbalance ensues from the inability for smaller markets to pay for better talent and vice-versa with the larger market teams.  An illustration of this concept is shown in the graph below. 

This graph shows us the interaction between franchises in a two team league, one small market team and one large.  The red-shaded area shows the payroll for the smaller market team and the green for the larger.  Given the marginal revenue curves we can see that the small market team generates much less revenue for players than the large market team.  The intersection of the two lines is the point where the marginal revenues are equal and hence the higher winning percentage goes to the large market team.  P* denotes marginal revenue price for each team. 

The Oklahoma City Thunder has a much higher winning percentage than the small market team depicted in the graph.  This raises an interesting question.  What is Oklahoma City doing that other small markets aren’t in order to gain the MRP of its players?  Well, let us take a look at a comparison of NBA payrolls for the Thunder as compared to other teams.  According to sportscity.com the Thunder payroll is in the middle of the pack at about $58 million.  A larger market team like LA, for example, has a payroll of almost $94 million and Boston’s payroll is almost $81 million.  With these payroll imbalances, one would expect a large competitive imbalance associated; with Boston and LA outperforming Oklahoma City by a very large margin.  However, this is not the case.  While Boston and LA are still dominant teams in the NBA, the Thunder have outperformed them by a slight edge the last two years. 

Star players in the NBA are often paid close to $20 million a year.  Dallas Mavericks’ Dirk Nowitzki made a little over $19 million in the 2011-12 season.  LeBron James, Dwayne Wade and Chris Bosh of the Miami Heat will make about $16 million this season.  The salaries for LeBron and D-wade are large pay cuts.  Kobe Bryant of the LA Lakers will make $25 million this season.  The Oklahoma City Thunder’s Kevin Durant will make just over $16 million this season.  Given that Durant was second in the NBA MVP race, behind LeBron James, it could be argued that Durant is underpaid.  Russell Westbrook is also a key player for the Thunder in their recent success.  Westbrook is considered one of the elite point guards in the league along with Derrick Rose, Chris Paul, and Deron Williams.  Deron Williams and Chris Paul will both make $16 million this season with Derrick Rose reaching the end of his contract making only $5 million.  With Derrick Rose’s resume he will undoubtedly receive a raise when he signs a new contract.  Westbrook will make just over $5 million this NBA season.  With the MRP for Westbrook and Durant it would be reasonable to assume that they are underpaid.  Other players are probably underpaid as well, but for our purposes we will focus on the two best players on the team.  The assumption that these players aren’t receiving their marginal revenue product may be true if they were in a larger market.  However, given the small market they play in, their MRP will be much smaller.  By this understanding, the MRP that is generated by Durant and Westbrook is just what the market demands.  In essence, the Thunder’s success is not contradictory to the idea of a winning percent equilibrium depicted in the previous graph.  To help illustrate this point the same graph is drawn for the OKC market below. 

This graph shows the same concept as noted earlier with a two team league.  However, MR(small market) curve has been pivoted to show a slight increase in marginal revenues for wins.  This in turn raises the price for the marginal revenue equilibrium and winning percentage with the edge now going to the smaller market team.  This small market team has a payroll well above average for a normal small market team and in this two team league it is above the larger market payroll. 

In the case of the Oklahoma City Thunder, their payroll is still below larger market teams, but it is above the average payroll for a small market team.  This can also be explained by the idea of diminishing marginal returns since the Thunder are still new to the city and the marginal utility is still much higher than other cities.  Thus, demand is higher in Oklahoma City.  To understand this further, Durant is certainly underpaid as compared to other players of his caliber around the league.  However, his MRP for the market of OKC is met.  Russell Westbrook is also underpaid but his MRP for the market in OKC is also met.  This is explained in the graph by the lower starting point for MR(small market) along the right vertical axis than the higher starting point on the left axis for MR(large market).  The change in slope for MRP denotes the change in demand for the smaller market and we see a large increase in payroll for the Oklahoma City Thunder.  Thus, the Thunder are not in conflict with the idea of a winning percent equilibrium.  The lower starting point for MR(small market) denotes the fan’s willingness to pay for better talent.  However, with the shift in the small market curve, the owner is willing to pay more for better players, but still under their MRP as considered league-wide.  All of these things denote an advantage for the smaller market Oklahoma City Thunder.  Now, the question is, how long will this last?