Incentives and Politics

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jul 2, 2012 2:11:37 PM

and tagged Politics and the Economy

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I am still digging into the Supreme Court’s decision not to strike down Obamacare, and have not yet fully digested either the economic implications or what we can reasonably expect to happen in the “unintended consequences” category, which I always find the most interesting part of an analysis. While I table discussion of the act itself, though, I think it’s worth mentioning the ways that the implementation will create new political incentives and how that will play out in the political process.

First of all, the fact that the bill is now considered largely constitutional lays the groundwork for implementation. I suspect that many states controlled by Democrats will move as quickly as possible to expand the health insurance rolls while states controlled by Republicans will do the opposite, and for the same reason: once the uninsured get health insurance, they have an enormous incentive to make sure, through political action, that it does not get taken away. If estimates are correct and 30 million people will get insurance, then there are millions of votes which, through self-interest, now have an incentive to vote for the Democrats.

Second, the benefits of the law will largely go to the less affluent or the unemployed, two constituencies that tend to vote for Democrats. Red states tend to be less affluent than blue states, meaning that the voter base of red states may be more affected and more likely to have an incentive to vote for Democrats, and therefore more likely to turn the state blue.

The Republican reaction, their express intent to derail or repeal the act as quickly as possible, demonstrates that they realize this. Their intent is not just to motivate their base, but also to prevent the growth of the Democrats’ base. The existence of the political incentives certainly does not devalue the economic and moral arguments on either side, but just adds another layer to analyzing the arguments. Both sides have massive political incentives to act as they do.

The political incentives, to my mind, drive not only a great deal of the rhetoric on both sides but also the policy analysis and creation. The current attack on the mandate is a good example. The idea of a health insurance mandate was, apparently, originally proposed by the Heritage Foundation in 1990. Mitt Romney’s Massachusetts health insurance reform included an individual mandate. In 2007, Republican Senator Bob Bennett of Utah offered a bill that featured a federal individual mandate. Clearly, the mandate was not always considered unconstitutional by Republicans.

From the other side, many on the left have been against individual mandates, as they would be unnecessary under a single-payer system and can be considered a windfall for the insurance industry. Clearly, where you stand on Obamacare and its individual components does not necessarily depend on where you stood in the past.

As the post-ruling battle starts to play out, the lines have been drawn and the incentives are in place. Back in the land of unintended consequences, it will be interesting to see if, for example, health care and pharmaceutical companies will line up with the pro-Obamacare forces, which would seem to be to their economic advantage.

Should be interesting.

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