The Becker-Posner Blog

Do We Need More Regulation of Mortgages to Protect Consumers?--Posner

The Treasury Department in its "white paper" of June 17 recommended the creation of a "Consumer Financial Protection Agency," and later followed up with a detailed legislative proposal for a "Consumer Financial Protection Agency Act of 2009." The proposal is pending in Congress. Although the Commission's remit would not be limited to mortgages, risky mortgage lending is the Act's principal target. The supporters of the Act maintain that quite apart from instances of fraud, which are punishable under existing law, many consumers were unable to deal sensibly with the terms of the mortgages that were offered to them during the housing boom of the early 2000s, which peaked in March 2006 and then deflated, bringing down much of the rest of the economy with it, as we know. The mortgage bankers and other sellers of residential mortgages often did not require that prospective buyers demonstrate that they had the financial wherewithal to be able to repay the mortgages; mortgages that required no down payment were sold, often to people of quite limited financial means; prepayment penalties were common, which make it costly to refinance a mortgage if interest rates fall; and many mortgages were "ARMs"--adjustable-rate mortgages, which specified low "teaser" rates for the first few years followed by higher rates when at the end of the teaser period the rates were "reset." A recent, and very thorough, article, by Oren Bar-Gill, "The Law, Economics and Psychology of Subprime Mortgage Contracts," 94 Cornell Law Review 1073 (2009), argues that many consumers made themselves worse off by taking out mortgages during the boom (in fact the bubble) period because they could not respond rationally to the offers by the sellers of mortgages. Many of them could not compare the terms of alternative mortgages (say a conventional 30-year mortgage and an ARM) because the terms were not stated in an intelligible fashion. In addition many consumers were afflicted by "myopia" and "optimism." "Myopia" in this context means inability to give proper weight to future costs--for example, higher interest rates when the mortgage resets; they do not look behind the "teaser" rates even though the reset rates are disclosed. "Optimism" in this context refers to exaggerating one's future economic prospects--unrealistically believing that either one's income will increase or housing prices will continue rising and by doing so enable one to refinance the mortgage on attractive terms--one's equity will have increased because the amount of the mortgage is fixed. Bar-Gill's concern with inadequate disclosure of the annual percentage interest rate of mortgages does not present a novel regulatory issue. The Truth in Lending Act requires disclosure of the annual percentage interest rate of a mortgage or other consumer loan (APR), and if the requirements are inadequate (Bar-Gill believes that the APR is not required to be disclosed early enough in the negotiations over the mortgage), or violations not punished severely enough to deter, the Act can be amended. But neither the Truth in Lending Act nor any other statute or regulation, so far as I know, requires that mortgage offers be designed to discourage choices based on myopia or optimism. Bar-Gill himself recommends only requiring earlier and clearer disclosure of APR, though he describes this as a first step in purging the mortgage market of irrationality, rather than a complete solution to the problems he sees. His analysis is based, as he explains, on findings by behavioral economists, who investigate departures from rationality in economic decision making. But like them, he does not make clear what he means by "rationality." It cannot mean full information, or the ability to process information flawlessly, because these condtions are rarely met in any area of human activity. It does, however, imply consistency and the avoidance of fallacies that cause serious harm, financial or otherwise, to people who harbor them. It is unclear that either myopia or optimism in the sense in which Bar-Gill uses these terms is irrational. It might seem that if the discounted annualized present cost of an ARM is higher than that of a fixed-rate mortgage, anyone who prefers the former is irrational: he is paying more than he has to. But that conclusion depends critically on the discount rate, which differs from person to person. Some people have very low discount rates; they save a lot of money, or they incur substantial costs in an education that will yield a commensurate increase in earnings only after many years. Other people have high discount rates; they live for the present. These people are not irrational. The difference between them and people with low discount rates is a matter of personality rather than of cognition. If you have a high discount rate, the low teaser rate in an adjustable-rate mortgage may be a good deal more attractive than the high reset rates. You are "irrational" only from the perspective of low-discount-rate persons, such as Professor Bar-Gill, who has two doctorates, two masters degrees, and a total of 13 years of education after high school. Optimism is also a personality trait, and, as it happens, one essential to human progress. As I have argued elsewhere with reference to our current economic situation, what Keynes called "animal spirits" and, alternatively, confidence or optimism are essential to entrepreneurship because of the great uncertainty of a business environment. Someone who invests in building a factory that will not produce anything for years is taking a big risk of failure, and because it is a risk that cannot be reliably quantified he is taking a leap of faith, and he will not do that unless he happens to have an optimistic outlook. It is not that rationality implies such an outlook, but that rationality is not inconsistent with it. Optimists are often disappointed, but sometimes are richly rewarded for the risks they take; and as long as the prospect for such rewards confers on them greater ex ante utility than more cautious, pessimistic decisions would do, they are not behaving irrationally. "Nothing ventured, nothing gained" is the credo of the optimist and the terror of the pessimist, but neither reaction is irrational. The optimist and the pessimist just have different personalities. Bar-Gill has made a value judgment rather than an economic judgment. Now it is possible that the kind of wet-blanket regulation that he might favor if he thought it feasible--which is the kind of regulation that the sponsors of the Consumer Financial Protection Agency Act very much do favor--could be defended on macroeconomic grounds, as conducing to economic stability. Had there not been in the early 2000s a strong market for risky mortgages, there would have been fewer defaults when the housing bubble burst and therefore less damage to the solvency of the banking industry. But whether the proposed Act would do anything to limit risky mortgage lending is unclear. It would authorize the Consumer Financial Protection Agency to require that a prospective mortgagor be shown, and entitled to choose, a "plain vanilla" mortgage that would be very short and easy to read and would alert the mortgagor to the various risks created by different mortgage terms. But if people have high discount rates and (or) are highly optimistic, disclosure of alternatives will not affect their choice. So the stability issue narrows to how many mortgagors there are who, if only the alternatives to a risky mortgage were presented clearly to them, would forgo the risky option. Doubtless there are some; Bar-Gill cites persuasive evidence of that. But enough to prevent another housing bubble? That seems unlikely, but is in any event unproven.

More Regulation of Mortgages would Likely Hurt Consumers-Becker

No doubt many consumers made mistakes in their credit decisions during the past few years, perhaps especially in the mortgages they chose. It is equally clear that many lenders wish they had never given the mortgages they gave since they lost their shirts by doing so. Does any of this mean that a commission to protect consumers would be a welcome piece of legislation? I am first of all dubious that consumers would have behaved much better if they had simpler contracts, or had the terms better explained to them. The fundamental problem is that consumers are generalists who must make thousands of decisions in highly different areas. As a result, they rely not only on their own limited knowledge, but also on competition among producers to help protect their interests. When that breaks down, as in the housing bubble, many consumers get hurt, but overall it is an excellent strategy for those who must make so many decisions based on quite limited information. Even if we agree on the above analysis, some will argue that a consumer "czar" would help protect the interests of consumers who make mistakes that markets fail to correct. For after all, the czar and other members of her commission would be specialists in consumer issues that might enable them to discover and correct consumer mistakes. This type of analysis is behind the "libertarian paternalism" in the book "Nudge" by Cass Sunstein-a former colleague and the present regulatory czar-and Richard Thaler, a colleague at the University of Chicago. A realistic view of the political process casts strong doubts on whether this is how such a commission would actually operate. Many political decisions are the result of a fierce contest between interest groups with different positions, as we are seeing clearly now in the fight over how health care delivery in the United States should be changed. In these battles, producers, like health insurance companies and doctors in the health care case, are much better organized politically than consumers. Producers can more easily coordinate their actions politically since they are usually either relatively few in numbers- as with health insurance companies- or they have effective trade associations that push their agendas, as with the farm lobby or the American Medical Association. Moreover, since what gets passed can greatly affect the livelihood of producers, they have a strong financial interest in getting legislation that helps them, or at least does not do much damage. The emphasis on consumer ignorance and mistakes makes it harder, not easier, for consumers to act as an effective political counterweight to the political power of producers since they supposedly do not fully know their own interests. So I would expect producers, such as issuers of mortgages or credit cards, to be able to manipulate in their own favor any attempt by the Commission to push regulations to help consumers. These advantages that producers gain from regulations have been called the "capture theory" of regulation in the political economy literature. In the case of consumer ignorance, capture by producers of the regulators is even more harmful to consumers since consumer regulations are likely to end up exploiting, rather than combating, this ignorance in order to benefit producers, the way a private monopoly exploits consumer mistakes. The cigarette settlement with the State Attorney Generals is a good example. Cigarette manufacturers paid billions of dollars to the states based on present and future production, even though they were being penalized for the harmful effects of past smoking. They got a settlement that also taxed potential new cigarette producers, so that cigarette producers were able to raise prices in response to the tax. In fact, prices went up by considerably more than the additional tax per unit. This enabled producers to recoup most of their payments to the state governments. But smokers paid a lot for the settlement through the much higher prices they had to pay. Perhaps that was desirable in order to cut smoking, but producers got off quite cheaply, and the poorer individuals who tend to smoke a lot were hit heavily by the settlement. I am dubious about this proposed regulatory commission for all the reasons Posner gives. In addition, I have argued that the Commission, whatever the intentions of Congress, the President, and members of the Commission, is likely to end up furthering the interests of mortgage companies, credit card issuers, and other producers at the expense of the very consumers it is supposed to be protecting.

The Cash for Clunkers Program: A Bad Idea at the Wrong Time-Becker

The cash-for-clunkers program of the federal government began in late July, and will end this evening. It provides a credit of from $3500-$4500 for anyone who trades in an older car to buy a new fuel-efficient car. When measured by its popularity, this has been a highly successful program, for about 500,000 applications have been submitted under the program during these few weeks. The strong demand caught the government by surprise, so that it had to add a couple of billion dollars to the one billion dollars initially allocated to the program. Officials are far behind in the paperwork required to compensate dealers for the cars bought under the program. Unfortunately, that the subsidies are popular is no measure of its public value, and I am afraid there is little to be said at any level in defense of a cash-for-clunkers program. Hundreds of thousands new cars will be purchased under the program, but many of these purchases would have occurred later in 2009 or in 2010 instead of during the five week window of the clunkers program. There is little value to the economy in subsidizing consumers to buy cars a few months earlier than they would have bought them anyway. To be sure, some cars would be purchased under the program that would not have occurred during the next 18 months, if at all. But if the goal of the program is to help stimulate the economy by subsidizing consumer spending, why limit it to individuals who own old cars? Why not give vouchers to all consumers that they can spend for a limited time period on many durable goods, such as computers, printers, TV sets, washing machines, and refrigerators? If that seems like too obvious a straight handout, the government could require consumers to turn in old computers or other durable goods in exchange for new ones. Of course, as with the cash-for car clunkers subsidy, many consumers under this more general clunker program would simply alter when they purchased the new durables to take advantage of the subsidy. The net result would again be subsidies that produced little net increase in spending. Several arguments might explain why the decision was made to concentrate the clunkers program on cars rather than include other consumer goods. A cynical view is based on the fact that the federal government is now a major stockholder of two auto companies, GM and Chrysler. Subsidies to stimulate the demand for cars raises the sales and profitability of these companies, which would help justify the Obama administration's decision to bail out these companies in a big way. Of course, the longer-term effect on GM's and Chrysler's profits would be small if the cash-for-clunkers program mainly redistributed new car purchases from later times into these past five weeks. That the government wants its car ownership balance sheet to look better does not mean that the program makes good economic sense. Another justification for the program relates to the environment, and argues that carbon dioxide and other pollutants from burning gasoline would be reduced if new fuel-efficient cars replaced old inefficient cars. However, the exchange of clunkers for new cars would raise, not lower, the amount of gasoline consumed to the extent that consumers traded in old cars that they never or seldom drove because the cars were in such bad shape for nice new cars that they would drive a lot. Even if the older cars were in reasonably good shape but got poor gas mileage, new cars would be driven more miles because, being much more fuel efficient, they would use much less gasoline per mile of driving. On balance, the clunker exchange might result in only a small net reduction, if any, in the amount of gasoline used. According to Sunday's New York Times, the average trade-in got 15.8 miles to the gallon compared to about 25 miles per gallon for the cars that were purchased. If the cars will be driven about 50% more miles per year than the clunkers that were exchanged-not an extreme assumption- there would be essentially no effect on the gasoline consumed. The main problem I have with the cash-for-clunkers program from the viewpoint of reducing pollution is that the program is such an inefficient way to cut down on gasoline consumption. The obvious best approach, not politically easy to accomplish, would be to raise the federal tax on gasoline. This would encourage owners of all cars to drive fewer miles since the cost of driving would go up for every driver, no matter how fuel-efficient their cars were. Higher gas taxes would especially encourage owners of older inefficient cars to drive much less-as they did when gas prices topped $4 per gallon- and even induce them to trade in their old cars for more efficient cars without offering any special incentives to do so. This criticism of the clunkers program as inferior to a gas tax applies also to the CAFÉ standards approach of the US to raise the miles per gallon of gasoline of the fleet of new cars produced, the cash and tax credit incentives to buy hybrids, and various other approaches that are being used to try to reduce gasoline use. There is a further major difficulty with the clunkers program that illustrates a much more general problem of fiscal efforts to stimulate the economy. The details of spending programs are so slow for legislators to work out, and the delays in implementing the spending are so long, that the government "stimulus" gets implemented usually only after the economy is already pulling out of a recession. The US economy and that of most other major nations have stopped declining and are beginning to grow again. Yet rather little of the Obama stimulus package has yet been spent. As Posner indicates, most of this spending has taken the form of transfer payments, but that is for a good reason since government projects are much slower to develop and implement. Even payments to car dealers under the clunkers program are being delayed because of administrative snafus in processing claims. This is a classical argument against using government spending for counter cyclical purposes, but seems to have been forgotten during this recession.

Cash for Clunkers--Posner's Comment

I agree with Becker that it's a silly program. Like the bailout of the auto companies, the program had dual environmental and economic-recovery goals. The environmental goal, to reduce carbon emissions, was trivial; the aggregate improvement in gas mileage from the program is certain to be minuscule. The contribution to economic recovery was probably very small as well--possibly negligible. The program was one of transfer payments, not government investment. The distinction is important to Keynesian deficit spending (what is now referred to as "stimulus") as a method of fighting a depression. The idea behind such programs is to replace deficient private investment with public investment, for example, the construction of a new highway. The government hires a contractor who hires workers and by doing so increases employment, which raises incomes and therefore spending. A transfer payment does not do that, at least immediately. It is true that people who participated in the "cash for clunkers" program couldn't pocket rather than spend the money they received from the government, as they could with the other transfer payments included in the stimulus program; they had to use it to help them buy a new car. But that is different from paying a road contractor to build a new highway. The contractor as I said has to go out and hire people to build it, so unemployment falls (on the assumption, correct with regard to construction, that there is a high rate of unemployment in the industry). The purchase of a new car merely reduces a dealer's inventory, and whether the reduction leads to new production will depend on estimates of future demand. Those estimates are likely to be inverse to the success of the "cash for clunkers" program. For, as Becker notes, the program may to a large extent merely have caused people to accelerate a previously determined intention to trade in their old car. Timing is important; had the program been put into effect in the winter, the buying spurt that it induced might have had a bracing effect on consumer confidence. But by August the economy had sufficiently improved that the need for confidence-boosting measures that had no other effect on economic activity had waned. Unlike Becker, I do not conclude from this unhappy episode that the Keynesian approach to fighting depression is misconceived. The problem with the $787 stimulus package that Congress enacted in February, to which the "cash for clunkers" program was a belated addition, was that it was poorly designed and has been lackadaisically executed. Roughly two-thirds of the program consists of transfer payments rather than public works, and because the Administration has failed to push the public-works components (it should have appointed an expediter to try to cut the red tape that smothers public projects), virtually all the stimulus disbursements to date have consisted of transfer payments (including, what are not really transfer payments, tax reductions that don't put cash in people's pockets until they are reflected in reductions in withholding or estimated tax payments, or in increased rebates when one files one's year-end return on April 15). Keynesians recognize that timing is key to the success of a stimulus program in fighting an economic collapse. The stimulus program should have been enacted last fall and heavily weighted in favor of public works concentrated in areas and industries of high unemployment, with provisions for cutting red tape even at the risk of a higher incidence of fraud and waste, which are constants in government programs.

Health Care, Cost, and Insurance Theory--Posner

The focus of the Administration's health-care plan, and of its campaign to enlist public support for the plan, is dissatisfaction with health insurance. To see the problem--or whether there is a problem--compare health insurance to fire insurance. Almost everyone has fire insurance (even if he doesn't want it, invariably it is required by the mortgagee, if there is one). The reason is that a fire can wipe out a big part of most people's wealth, and, given declining marginal utility of income, which makes most people prefer a certainty of obtaining a million dollars to a 50 percent chance of obtaining $2 million (and a 50 percent chance of nothing), the cost of fire insurance is a good investment. The insurance company knows how much it may have to pay if there is a fire because the insurance policy has a dollar limit. If someone is convinced that his house is fireproof and therefore fire insurance would be of no value to him, and therefore refuses to buy it, the insurance premiums charged the buyers of fire insurance will be slightly higher (because his being in the pool would have reduced the expected cost to the insurance company). But no one is concerned with this, because very few people opt out of fire insurance. Health insurance is different superficially because of the extreme variance in costs of medical treatment; some people have medical conditions that cost literally millions of dollars to treat. But this is a problem in other forms of insurance as well, such as liability insurance in which the insurer undertakes to pay the insured's legal expenses, which can be astronomical; and insurers deal with such difficult-to-estimate risks through reinsurance and large deductibles. Health insurers, if left to themselves, generally refuse to insure the cost of treating pre-existing conditions; but that is no different from a life insurer that refuses to issue a policy (or charges more for it) to someone whom a medical exam reveals to have a short life expectancy. Prudent people buy life insurance when they're young and in good health. Health insurers often cancel an insurance contract, or refuse to renew it, after discovering that the insured is in bad shape and likely to cost the company a great deal in the future. Fire insurers and automobile insurers often do the same thing. If people want to have lifetime protection, they have to pay higher premiums but it is hard to see why health insurers would refuse to offer such contracts; in fact some people do have such health insurance. There are several puzzling aspects to health insurance, one of which, however, is rather easily solved, and that is the fact that a significant fraction of the population has no private health insurance. If your house burns down and is uninsured, tough luck. But if you get sick and have no insurance and no money, you can still get treatment at the nearest hospital emergency room. (You will be billed, and if you have enough money you will have to pay the bill.) If you have no money, you're a free rider, but the amount of free riding is kept down by the cost that emergency rooms impose on patients by making them wait--and a queuing cost is a real cost to the people forced to stand in the queue. Many of the uninsured are young and healthy; they are like the person with the fireproof house. If they were forced to insure, therefore, premiums for health insurance might fall, though this is highly uncertain. Many of the uninsured, rather than being young and healthy, are uninsured because of pre-existing medical conditions that imply that these people will incur abnormally high costs of treatment in the future. Medicaid, charity treatment in emergency rooms of hospitals, and Medicare when utilized by indigent people constitute a form of poor relief. There is no reason why Medicare shouldn't be means-tested; people who can afford medical care should pay for it themselves. The fact that, because of tax subsidy, most health insurance is offered as an employment benefit screws up the health-insurance system considerably. Not only does the subsidy result in giving people more medical benefits that they would want if they had to pay the full, unsubsidized price. They lose the insurance if they lose their job or if the employer cancels the group insurance policy, and when they seek new insurance they may find themselves turned down, or made to pay a very high price, because of their age or because they now have a pre-existing condition. If people were willing to pay high premiums, and accept high deductibles and copayments, they could buy health insurance policies that would give them lifetime protection against all major medical problems they might encounter. But people are not willing to pay high premiums or (mysteriously) to accept high deductibles and substantial copayments. They prefer to take a chance on their employer-supplied health insurance and on making it to 65 (Medicare eligibility age) without going broke as a result of a medical condition for which they are not adequately insured. And if they have no employer-supplied health insurance they may decide to do without and hope for the best even if they could afford to buy an expensive individual policy. Repealing the deductibility of employer-supplied medical benefits from federal income tax, and instituting a means test for Medicare, would reduce the demand for, and therefore total cost, of medical services and reduce the federal deficit as well, since Medicare costs the federal government more than $300 billion a year. Since Medicare would cover fewer people, there would be less need to institute procedures designed to limit expense by limiting treatments--something people fear, whether rationally or not.

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It is doubtful whether any other measure consistent with American culture and values would reduce medical costs substantially, though one can imagine a series of modest reforms that might add up to a net savings, including limiting liability for medical malpractice, imposing large deductibles for medical treatment for injuries experienced in dangerous recreational activities, reducing highway speed limits, and taxing fattening foods and beverages. None of these is likely to figure in any health reform enacted by Congress at the present time, however. The opposition to the Administration's health plans is understandable, though some of it is uninformed and even irrational. The Administration's problem is that it wants to expand insurance coverage, and this will increase the cost, including the public cost, of the health-care system, but that the only serious way in which the Administration can imagine limiting the cost increase (as there is insufficient public support for terminating the tax subsidy of employee health benefits, let alone for limiting Medicare to people who can't afford private health insurance) is by curtailing treatment. And that upsets people, since they don't trust the government to decide what medical treatments are cost-justified. (And why should they?) In all likelihood, moreover, the Administration is underestimating the cost of expanding coverage. It wants to push as many of the currently uninsured as possible into insurance plans, and this will not only cost a lot in subsidies, as well as in higher costs to employers; it will also increase the demand for and thus the aggregate cost of medical services (because supply is inelastic). Once a person is insured, the marginal cost (which includes the queuing to which the uninsured are subjected, as well as monetary cost) to him of treatment drops to the copayment or deductible. The government also wants to forbid insurers to deny coverage on the basis of pre-existing conditions or to rescind policies after paying a large claim to an insured (and foreseeing future such claims). This will increase the cost of health insurance, and the government will doubtless end up picking up the tab, because there is great resistance on the part of the public to paying higher insurance premiums. The cost of the projected health reforms cannot be estimated. One reason is that no one seems to know what is actually in the literally thousands of pages of health-reform bills drafted by different congressional committees. Or if they know, they are not telling. Another reason for uncertainty about cost is that no one outside government (maybe inside it as well) knows what the Administration is likely to settle for in its negotiations with the various interest groups and legislators. But worse than not knowing the cost is not knowing how it is going to be paid. Higher taxes, unless trivially higher, seem politically infeasible, which means that health reform if enacted will add to our soaring national debt--and probably add a lot, though we cannot know how much.

American Health Care Once Again-Becker

In a recent post (see my discussion on July 28) I explained why the American health delivery system is superior in some important dimensions to health care in most other advanced countries. Americans have considerably longer life expectancies when they contract serious diseases, like cancers and heart conditions, than do persons living in these other nations. That post emphasized that many criticisms of the American system do not sufficiently appreciate its positive effects on both the quantity and quality of life. Here I address a few of its major shortcomings, and suggests ways to overcome, or at least moderate, these without eroding the strong parts of the system. I recommend to readers the many high quality discussions of health care reform by John Goodman of the think tank, The National Center for Policy Analysis, and also a good op-ed piece in the Wall Street Journal of August 12th by John Mackey, CEO of Whole Foods. A glaring weakness of the American health system is the over 40 million Americans without health insurance. To be sure, they impose much less of a cost on the health care system than is commonly claimed, partly because the majority of the uninsured are young and healthy. Still, in a country as wealthy as the US, this is embarrassing, and should be rectified. The least bad solution, strangely, opposed by many conservatives, is to require everyone to take out catastrophic health insurance that covers each person against major illnesses. Those individuals and families that lack the means to pay for such insurance would be supported under a version of Medicaid. Such compulsory insurance for everyone would greatly reduce the uninsured problem, in particular their free riding on others when they get seriously sick and go to hospitals for extensive care. Increasing their medical coverage in this way would add to total spending on medical care, but it might well reduce the cost of medical spending to others. Since the uninsured would be forced to take out such insurance, they would pay for any major medical care through insurance premiums rather than imposing the cost of their care on taxpayers and other groups who pay for their hospital care. Another feature of the present system is that most Americans receive their health insurance through employment. Americans are stuck for political reasons with this system for a while, yet a few important changes may be politically feasible to significantly reduce its cost, inequities, and inflexibilities. To start, a cap should be placed on the amount of employment-based health insurance that is tax-deductible, so that employees would have to pay for so-called "Cadillac" plans out of their own incomes rather than out of taxpayers' incomes. A second reform would be to provide the tax savings from these plans in the form of tax credits rather than tax deductions, so that higher income employees would not have a tax advantage to opt for expensive plans only because taxpayers foot much of the bill. A third and very important reform of the employment -based health insurance system would be to make the same tax savings available to persons who buy health insurance outside of their jobs. One advantage of encouraging the purchase of non-employment-based health insurance is that persons changing jobs would not risk losing their health insurance. This would also raise the attractiveness of working at small companies that find it too expensive to provide health insurance. This extension would increase the taxpayer burden from health insurance, but that burden would be offset by the elimination of the tax deductibility of Cadillac plans. Perhaps the greatest problem facing the health care system is the high and rapidly growing cost of Medicare for the elderly as the American population ages, and as new drugs and surgical procedures are developed to treat diseases of old age. I agree with Posner that a means test for Medicare should be implemented, so that older men and women who can pay for their medical care should get a much smaller subsidy. This would reduce the incentive for these persons to opt for expensive drugs and surgeries only because they pay a small share of the cost. I do believe that older persons would still be willing to pay a lot to extend their lives, partly out of their fear of death. But that belief should be put to the test by requiring the elderly who are reasonably well off to spend more of their own money for their medical care. In order to increase the number of older persons with enough financial means to cover much of their spending on medical care, further encouragement should be given to tax exempt health savings accounts, where unused balances can be carried over to later years. By age 65, families that have made prudent use at younger ages of the monies in these accounts would then have accumulated sizable balances that will prepare them much better financially for the medical risks of old age. Another way to reduce medical spending by the elderly in the long run is to encourage, not continue to attack, drug and biotech companies, so that they invest more in developing new drugs that treat better the major diseases of old age. The research and development work required to expand significantly the production of new important drugs would add only a very small fraction to the huge total medical spending. Moreover, this cost would be more than offset by the savings from substituting drugs for expensive surgeries or hospital stays, for drugs have the major advantage over these other treatments that they can be used to treat large numbers at relatively small additional cost. The cost structure of drugs- high initial costs and then low costs of extensive use among the population- is especially advantageous to a health care delivery system, like the American one, that has trouble denying available medical care to persons who might benefit only very slightly. The current Congressional bills on health car reform generally include a public insurance option; that is, a federal government health insurance plan that would compete against private plans. The Obama administration is retreating from its emphasis on the importance of including this option, and the details about the form such an option will take have not been spelled out. Nevertheless, the experiences of other government-run operations strongly indicate that whatever Congress says in these bills, such an option will cause far more harm than good. For one thing, employees of a government-run health plan are likely to be unionized, just as public school teachers and postal workers are unionized. These unions have raised the costs of operating schools and the postal system through their pay structure, and they have reduced the efficiency of these operations through opposition to innovations, merit pay, and other efficiency-raising changes. Supporters of a government-run plan claim that it will be financially self-supporting, and will provide a standard for private plans. To see how this would work out in practice, consider the postal system, a nominally private but basically a very old government -run business. The postal system is also supposed to be self-supporting, but only recently it once again asked Congress for additional subsidies to cover deficits. It strains credibility to expect that a large government-run health care option will not run huge deficits. Just as part of the postal deficits are caused by government mandates, such as providing Saturday deliveries at no added cost, so Congress will also impose costly and inefficient mandates on the government health care option, in addition to other inefficiencies of such a government health care organization. The micro details of the way the postal system operates are hardly reassuring about the efficiency or flexibility of a public insurance option. To illustrate, we summer in a small town on Cape Cod that has about a 1,000 year-round population that rises to about 10,000 during the heart of the summer. In responding to this large seasonal change, Fed Ex, a non-union private company, rents delivery trucks from auto rental companies to supplement their own fleet of trucks, adds temporary workers, and extends their hours of operation, so that they often make deliveries long after sunset. By contrast, the local post office maintains exactly the same hours as during the off-season. This includes closing for lunch from 12-1, closing at 4:30PM every weekday, and staying open only for a few hours on Saturdays. Since there is no regular mail delivery because the all year round population is too small, many families rent boxes at the post office. Instead of arranging to allow box-holders to access their boxes at most hours even when the postal window is closed, box access is only marginally better than access to the postal window, including no Sunday box access, and only morning Saturday access.

Notice

We will be posting tomorrow (Monday).

The World Recession is Ending: What Next? Becker

The latest output and unemployment figures for the United States indicate that the recession in this country is very probably finally over, given the usual definitions of the turning points of recessions. Aggregate output fell for the fourth quarter in a row during the second quarter of 2009, but the latest fall was small. All the indications are that American GDP will increase during the current quarter, although not sharply. The unemployment rate actually fell slightly in July. This may be a one-month statistical anomaly since unemployment usually lags the economy, but the rates of fall in jobs and unemployment have been declining for several months now. The recessions in China, India, Brazil, and a few other countries have also ended, so it strongly looks like the world recession is also over. Some countries, like Spain, have still not turned the corner, but they will be helped by the end of the global recession. It was a severe recession, in many respects the most severe global recession since the 1930s, such as the cumulative fall in aggregate output. But even that only amounted to about four percent. Moreover, it was not the most severe in all the important dimensions. For example, the latest unemployment figure for the US is 9.4%, which is high, but well below the 10.8% reached at the end of 1982 after a severe couple of recessions in the early 1980s. Unemployment will probably continue to rise for a while since unemployment usually lags the turn in output. However, it now appears that unemployment will very likely peak below 10.8%, perhaps well below that previous high. In addition, productivity held up better in this recession than in many others. While this has been a severe global recession, it is very far from resembling the Great Depression of the 1930s. That depression had a peak American unemployment of 25%, and over a 20% fall in its output compared to the few percentage point falls in output during this recession. The many comparisons made to the Great Depression by economists and others during the dark months at the end of 2008 and beginning of 2009 now look kind of silly- and I said so at the time- although admittedly there was then considerable uncertainty about how bad this recession would become. Although the severity of the world wide financial crisis was unprecedented (aside from the 1930s depression), the real side of the economy followed traditional recession patterns. For example, as usual, durable outputs, such as of cars, tractors, and houses, fell far more sharply than services, especially than education and health. Much ink was devoted to the many educated employees of the financial sector who lost their jobs, and they did usually have a tough time, but as in previous recessions the least educated were hit the hardest. As of the end of July, the unemployment rate among high school drop outs was 15.4% compared to 9.4% for high school graduates, and only 4.7% for persons with a bachelors degree or higher. In addition, the percentage point increases in unemployment rates during the past year were much higher for the less educated. Similarly, black unemployment clocked in at a 14.5% rate compared to 8.6% for whites, while during the past year black unemployment increased by 4.6 percentage points compared to 3.4 percentage points for whites. The fraction of those unemployed that have been unemployed for six months or longer, at 34%, is one significant employment statistic that is unusually bad during this recession. This is apparently the highest fraction of long-term unemployed Americans for 60 years. How important were monetary and fiscal policies instituted during the past year in preventing a far more serious recession? Only time and further research will permit more confident answers to this question, but I will give my tentative opinion. Fed open market policies that bought financial assets from banks and others, and created huge amounts of excess bank reserves in the process gave banks a financial cushion that helped dampen their retreat from risk. Decisions of The Treasury under both Henry Paulson and Timothy Geithner have been a mixed bag, sometimes helping banks deal with toxic assets, while at other times adding to the uncertainty by being erratic and indecisive. The decisions to let Lehman fail but to merge Bear Stearns and force the merger of Merrill on Bank of America will be debated for a long time. I continue to believe that the bail out of GM and Chrysler by the Bush, and especially by the Obama, administrations were serious mistakes that will eventually cost over $100 billion of taxpayers' monies. It would have been far better to let both companies file for bankruptcy in the Fall of 2008, for they would have emerged from bankruptcy court with lower labor costs and considerably slimmer than they are now. To be sure, Chrysler may have closed shop, not a bad development, and sold its Jeep and one or two other strong divisions to other companies. Not surprisingly, the Obama administration is taking credit for ending the recession. According to the New York Times, President Obama said that his administration had "rescued our economy from catastrophe". The administration in particular is pointing to the stimulus package- the American Recovery and Reinvestment Act- for the relatively good employment report for July. Yet this stimulus package could not yet have had much direct effect on employment since only about $100 billion, or less than 1% of GDP, of the $787 billion in this package has so far entered the economy. And much of that $100 billion has been directed to service sectors that do not have excessive unemployment rates. As I mentioned, some Fed and Treasury policies helped a lot, but the capitalist American economy continues to have strong momentum as well. Recessions always end and usually change into booms. While this has been an unusually long recession, the incentives of firms to find profitable opportunities, and the desires of consumers to spend, contributed in important ways to ending this prolonged recession. Where will the world economy, and the American economy in particular, go from here? Most economists are predicting a flat recovery for the United States that will not take off toward robust growth until late in 2010 or even in 2011. It is notoriously difficult to predict turning points and how fast economies come out of recessions. The 1930s had a fast recovery for a couple of years during 1934-36 before it fell back into another severe depression. One main reason for pessimism about the strength of the recovery is that banks are generally afraid of taking on additional risks since they still hold many assets of dubious value. In addition, companies are also wary of investing and adding to their employment because of the remaining considerable uncertainty about the economy, and because consumers are continuing to rebuild their wealth portfolios after the hits they took from the sharp declines in stock markets. I am more optimistic about the world and US recovery than the consensus, although I do not expect a sharp expansion during the next few months. My reasons for greater optimism include the robust recoveries in China, Brazil, and some other countries that will boost world output, and raise demand for US exports. The large excess reserves created by the Fed- some $800 billion- will induce banks to look for more profitable investments than the meager interest they earn on these reserves. The working down of the housing and auto stocks during the past couple of years will result in demand for new residential construction and cars that will stimulate these depressed industries. Firms are still hiring in large numbers, although less than the number they are letting go. One indication of the growing strength of the US labor market is that- as my colleague Casey Mulligan pointed out to me- seasonally unadjusted employment has risen during this summer. Still, I do have some concerns about the US recovery, beyond the overhang of many billions of dollars of rather worthless assets held by banks. Casey Mulligan has been stressing that the federal government is creating many programs, such as reducing student loan repayments and mortgage payments for persons with low incomes, which discourage the unemployed from finding jobs, and encourage the employed to become unemployed. The proposed caps of various kinds on executive pay, especially in the financial sector, the large government debt being created due to huge fiscal deficits that will put upward pressure on interest rates, the European style reorientation of anti-trust policies toward protecting competitors rather than consumers, the enormous excess reserves that have a considerable inflation potential, the federal government's likely incompetent management of two of the three American auto companies and a major insurance company, and the planned creation of a consumer czar that will interfere with the goods and services offered consumers are examples of policies that are likely to discourage business investment and risk taking. So legitimate reasons exist for concern about the speed and strength of the recovery of the American economy. However, I worry much more about various regulations, spending, and controls being introduced by the present Congress and by President Obama than by intrinsic difficulties in the American economy.

It

I see the economic situation somewhat differently from Becker. The least significant of our differences concerns nomenclature. Many economists describe any economic downturn less severe than the Great Depression of the 1930s as a mere "recession." The consequence is to lump together economic downturns of greatly varying severity. The current downturn is far more serious than any of the downturns the nation has experienced since the end of the Great Depression. It is true that unemployment was higher for a time in 1982 than it is now, but unemployment is not the only measure of economic distress. Duration is important as well, but even more important are the political consequences of the downturn. These are likely to be profound, as I believe Becker agrees. Other economists use an arbitrary benchmark, like 10 percent unemployment or a 10 percent drop in output. Unemployment was 9.5 percent in June, 9.4 percent in July (a drop due solely to the fact that fewer people are looking for work--they have given up hope of finding a job in the near term). If it rises to 9.6 percent next month, will that convert a recession to a depression? I also disagree with the view that a recession or depression ends when output stops falling. That would mean that the Great Depression ended (though it later restarted, as Becker mentions) in March 1933, when unemployment was 25 percent and output had fallen by a third since 1929. A recession or depression ends, in my view, when output rejoins the GDP trend line, that is, when it reaches the level it would have reached had the economy grown at its average rate of growth, rather than being depressed. At the moment, as I point out in my Atlantic blog entry of August 1, output is 7.2 percent below the trend line, which suggests that the economy will remain depressed for at least the next two years. Distance from trend line seems, by the way (to recur to the discussion in the previous paragraph), a better measure of the gravity of an economic downturn than drop in GDP. If GDP is flat, or rises only very slowly, for years, the gap between actual and trend-line output eventually becomes enormous. The global economic crisis has exposed many weaknesses, mainly I think in government and in the economics profession, specifically that part of the profession that studies the business cycle. These weaknesses are among the most interesting aspects of the current depression. I attribute the depression mainly to unsound monetary policy by the Federal Reserve under Greenspan and (initially) Bernanke and lax regulation of financial services by the Fed, the SEC, and other government agencies, and to a general complacency concerning the self-regulating capacity of free markets. Government officials (many of them economists), business economists, economic journalists, and academic economists alike were, with rare exceptions, taken by surprise by the bursting of the housing bubble (they didn't realize it was a bubble), the ensuing banking collapse, the stock market crash, the sharp decline in output and employment, the global scope of the crisis, and the onset of deflation in the late fall of 2008 that created fears of a depression comparable to the Great Depression of the 1930s. By the beginning of this year Bernanke and other senior officials, along with many economists, businessmen, and consumers, were in a state of near panic. A number of macroeconomists and financial economists, including leading figures in these important branches of economics, had believed until last September that there could never be another depression, that asset bubbles are a myth, that a recession can be more or less effortlessly averted by the Fed's reducing the federal funds rate, that the international banking industry was robust, and that our huge national debt was nothing to worry about, nor our very low personal savings rate. All these beliefs have turned out to be mistaken, along with influential versions of the rational expectations hypothesis, the efficient-markets theory, and real business cycle theory. The rapid increases in housing prices during the early 2000s were a bubble phenomenon (contrary to Bernanke's statement in October 2005 that they were driven by "fundamentals"), and the bursting of the bubble brought down the banking industry because the industry was heavily invested in financing the bubble. The low personal savings rate reflected people's belief that ownership of houses and common stocks was a stable form of savings, so that when the prices of these assets plummeted the market value of people's savings fell steeply. People had to rebuild their savings, and so personal consumption expenditures fell, precipitating a steep decline in output and a sharp rise in layoffs. That in turn created a downward spiral accelerated by the distress of the banks, which reduced access to credit by both businesses and consumers. Our national debt, and the government's unwillingness or inability to prevent it from growing--the Bush Administration having established, contrary to traditional Republican principles, a pattern of coupling extravagant government expenditures with steep tax cuts--complicated the response to the economic crisis by limiting the amount of new debt that the government could prudently take on. Because economists have yet to achieve an adequate understanding of the macroeconomy and business cycles, I do not think it is possible to fault the government for having acted aggressively--and expensively--to fight the crisis. By flooding the economy with money (in part by purchasing huge amounts of private and long-term public debt, rather than just short-term Treasury notes), and bailing out the major banks (particularly the "nonbank banks" that have become indispensable sources of credit) with government loans, the government placed a floor under the precipitous drop in lending that began last September. Lending has continued to decline, though slowly. The continued decline is due partly to the fact that banks have hoarded most of the money they've received from the government rather than lending or otherwise investing it (because default rates are high and bank capital is still impaired despite the government largesse), and partly to the fact that the demand for loans has dropped as overindebted consumers, and businesses facing reduced demand for their output, have retrenched. Many mistakes were made in the government's response to the crisis, in part because the possible need for aggressive interventions to stave off economic disaster had not been foreseen (the problem of complacency)--notably the failure to save Lehman Brothers. But on the whole the government's response was--until reccently, as I am about to explain--appropriate, given the risk of an even worse economic collapse. The most controversial measures taken by the government have been the bailout of General Motors and Chrysler, which began last December, and the $787 billion stimulus (Keynesian deficit spending) program enacted in February. I believe both these measures were justified, though for reasons that do not receive sufficient emphasis. Contrary to what until recently most macroeconomists believed, a capitalist economy, though superior to any other economic system, is inherently unstable because of its potential for adverse feedback effects; hence the need for watchful monetary and fiscal regulation. A severe shock, such as the economy received last September, can, without prompt and effective government intervention, trigger a steep downward economic spiral, with sharply reduced consumer spending, resulting in falling output that precipitates layoffs that result in reduced personal income and so further reduces spending and hence output, which induces further layoffs, which further reduce incomes and spending. As spending falls, sellers reduce prices, which creates expectations of further price reductions (deflation), which induces hoarding, since in a deflation the purchasing power of money rises even if the money is kept under one's mattress rather than being invested; so investment drops. Deflation also increases the burden of debt, which precipitates defaults and bankruptcies and further reduces incomes and spending. The fear of a deflationary spiral such as I have just described was acute at the end of 2008 and the beginning of this year, and could not be dismissed as unfounded. In that setting, bailing out GM and Chrysler was a prudent measure, since without it both companies would have had to declare bankruptcy and might have liquidated rather than reorganized, because the credit crunch had temporarily eliminated the availability of "debtor in possession" financing, essential to a reorganization in bankruptcy. The auto companies would have run out of cash by the end of December. To continue operating, therefore, they would have had to borrow money. But no bank or other private entity was lending "DIP" money then; it was near the peak of the credit crunch. If the auto companies had been unable to obtain DIP financing, their creditors would have had to force liquidation, which would have resulted in an increase in the unemployment rolls, possibly by millions, within a very short time. That would have been a severe further shock to an already deeply wounded economy. Similarly, with regard to the stimulus, when Obama took office on January 20 the measures the government had taken to date--the easy money, the bailouts, and so on--had not arrested the economic decline. For the new Administration to have announced that it had run out of ideas for arresting the decline, and we'd just have to tough it out, could have produced a catastrophic drop in business and consumer confidence, which could in turn have increased hoarding, layoffs, deflation, and so forth. The auto bailouts staved off the collapse and possible liquidation of GM and Chrysler; and the stimulus package, by showing that the President and Congress were determined to react with maximum vigor to the economic crisis, buoyed (I am guessing) business and consumer confidence. In addition, although estimates of jobs saved by the stimulus are bogus, the initial expenditures under the program, consisting of tax credits and increased unemployment-insurance and health benefits, are probably responsible for a slight increase in personal consumption expenditures, which in turn may have had a slight indirect benefit on output and employment. The much-criticized "cash for clunkers" part of the stimulus, though it will do nothing for the environment, has, at the least, by inducing increased purchases of motor vehicles, increased confidence that the economic downturn is bottoming. Unfortunately, the auto bailouts of last December have morphed into a huge and possibly quixotic project of revitalizing, rather than just postponing the demise of, two highly inefficient enteprises; and the stimulus package, being poorly designed, is likely to have its maximum impact late next year and in 2011 and 2012, when it may not be needed but will contribute to the danger of a serious inflation. Economic recovery is also being undermined by the Administration's efforts, in the midst of crisis and without adequate study of its causes, to revamp the regulatory structure of the finance industry. The economy remains imperiled. If the Administration's trillion-dollar health care program is enacted in anything like its proposed form, the costs, on top of the rapidly rising public debt that is the consequence both of the impact of the depression on tax revenues and the costs of the anti-depression programs may create an aftershock to the current depression that will do almost as much harm to the nation as the--I insist on the term--depression itself.

Health Reform and Obesity--Posner

The biggest problem besetting the Administration's program of health reform is how to pay for it. The heart of the program is extending insurance coverage to tens of millions of people who at present are not insured. This will cost more than $100 billion a year just in subsidies, but the total cost will be higher because demand for medical services will rise. At present, people who are not insured are billed directly for medical services. Often they cannot pay, but then their credit takes a hit, or they are forced into bankruptcy. And emergency rooms use queuing to increase the cost of their services to the indigent. When the uninsured become insured, the marginal cost of medical services to them falls to the copayment or deductible that they are charged; the total price (pecuniary plus nonpecuniary) is now much lower, so more service is demanded, and prices to all consumers of medical services rise because supply is inelastic. Some advocates of extending coverage argue that it will reduce aggregate medical costs. They point out that people may defer preventive care that might ward off an illness, or a worsening condition, that might cost more to treat than preventive care would have cost. The other side of this coin is that preventive care may keep alive people who would have died, thus ending their demand for medical care. But everyone dies eventually, and a very high fraction of total medical costs are incurred in the last few months of life. Moreover, because of technological progress and the high value that people place on extending their life, medical expenses are growing far more rapidly than per capita income, and, as a result, postponing death imposes disproportionately greater costs on the next generation. A partial offset, however, may be that greater and therefore more costly efforts may be undertaken to postpone death the younger the dying person is. Preventive care can also be very costly, especially when it takes the form of expensive screening: screening costs are incurred by the healthy as well as the sick. The most attractive form of preventive care, at least from a government budgetary standpoint (disregarding for a moment nonpecuniary benefits and costs, to which I'll return), is behavioral change: for example, safe sex as an AIDS preventive--or losing weight, or, more realistically, not gaining excessive weight in the first place, to prevent obesity. Obesity has increased rapidly in the United States, to the point where, at present, more than half the adult population is overweight and 25 percent is obese. A recent study estimates that the average obese person incurs annual medical expenses that exceed by 42 percent the average annual medical expenses of the non-obese; the aggregate excess cost is almost $150 billion a year. Average expense is potentially misleading because of the shorter lifespan of unhealthy people. However, I believe that except in cases of extreme obesity, the effect on lifespan is less than the effect in creating medically treatable conditions such as diabetes, joint problems, complications from surgery, and cardiovascular disease. The economist Tomas Philipson and I have written about the economics of obesity. We have pointed out that the decline in the price of fatty foods, along with the rise in the opportunity cost of physical activity (work is more sedentary than it used to be, so one has to invest extra time to get exercise, and television and video games have increased the utility that people derive from sedentary leisure pursuits), explains the dramatic long-term increase in the percentage of Americans who are seriously overweight. It might seem that if people derive greater utility from consuming fatty foods in large quantity than the costs in illness and medical care, the increase in obesity actually is optimal from an economic standpoint. But there are three reasons to doubt this. The first is that the obese externalize part and probably most of the excess medical costs that their condition imposes, because health insurers (including Medicare) generally do not discriminate on the basis of weight. The second reason to doubt that we have the optimal amount of obesity is that high and rising aggregate health costs, because financed to a large extent by government, are contributing to the serious fiscal problems of the United States: the United States has a soaring national debt that may have very grave long-term consequences for America's prosperity. Obesity thus has potential macroeconomic significance. Third, there is reason to doubt that the obese actually gain more utility from the behaviors that contribute to their obesity than the costs of obesity, which are not limited to medical costs but include discomfort, loss of mobility, discrimination by employers, and social ostracism by people who consider obesity repulsive or believe it signals lack of self-control, gluttony, or low IQ (or all three characteristics). Obesity is highly correlated with education. Highly educated people are much more likely to be thin than people who are not highly educated. This is partly but not only because highly educated people have on average higher incomes than other people. They can afford more expensive foods, which are low in calories, and the cost of exercise, which can be considerable, as it may require joining a gym or having a personal trainer. But income is not a complete explanation, because highly educated people in low-paying jobs, as many teaching (including college teaching) jobs are, tend to be thin. But is this because one needs education to realize that eating fatty foods makes one fat and that fat people have medical and other problems that thin people do not? Surely not. It is rather that educated people have better impulse control, or, in economic terms, a lower discount rate (the rate at which a future cost or benefit is equated to a present cost or benefit), than uneducated people do, on average at any rate. To get an education means incurring present costs for future benefits, and that is less attractive the higher one's discount rate. Moreover, intelligent people derive greater benefits from education in terms of present enjoyment and future income than unintelligent people do, and intelligence implies lower costs of foreseeing consequences of one's actions: it is easier for an intelligent person to realize the consequences of indulging one's tastes for fatty foods than an unintelligent person, given that obesity is not an immediate consequence of eating such foods. Low-IQ people (and many high-IQ ones as well) may also fail to realize how much more difficult it is to lose weight than to avoid gaining weight in the first place. A further problem with people of low intelligence and (what goes with it) low income is poor parenting, as a result of which children grow up with bad eating habits, including excessive consumption of fatty goods; these habits may be difficult to break in adulthood. If the unintelligent experience greater costs of imagining the consequences of eating fatty foods, that is an argument for providing them with greater information about those consequences, to offset their deficit in understanding. Maybe with full knowledge the unintelligent would be willing to incur the costs, in somewhat more expensive food and in fewer sedentary leisure pursuits, of avoiding becoming obese. So aggregate utility might actually be increased, as well as aggregate medical costs reduced, by an effective campaign of warning people about the consequences of eating fatty foods. I do not think that government should regulate behavior on the premise that it knows better what makes people happy than people themselves do; but controlling external costs is or should be an uncontroversial governmental function. Such an educational campaign as I have suggested would be a cheap form of preventive care, but would it be effective? The evidence is mixed, but a 2008 review article by Lisa Harnack and Simone French in the International Journal of Behavioral Nutrition and Physical Activity finds that labeling restaurant menus with calorie information does reduce consumption of high-calorie foods. Conjoined with reduced calories in school lunches, elementary- and high-school courses in nutrition, and warnings in food advertising and labeling similar to the warnings in cigarette advertising and labeling, the prevalence of obesity might be reduced at slight cost--possibly to the benefit of almost everyone except the sellers of fatty foods. One of the health-care-reform bills pending in the Senate would relax legal limitations on "discrimination" by private group-health insurers; that is a step in the right direction, as are growing efforts by employers to encourage their workers to control weight (the motive is to reduce the cost of health insurance to the employer). Medicare could be modified to reduce fees to thin people. In addition, a calorie-based food tax (which would, for example, fall heavily on sugar-flavored soft drinks), would reduce obesity at negative cost to the public fisc. Such a tax may seem "unfair" to people who consume such foods but are thin, but this is just to say that the tax would be at once a regulatory and a revenue tax, and in the latter aspect would be subject to criticism only if it were an inefficient tax relative to alternative methods of taxation.