“Too big to take a pay cut”

Here is my latest column.  It's about how politicization is behind the financial crisis (in part), why we haven't learned very much from the financial crisis, why we are treating the health care sector just as we have been treating the banks, and why Atlas Shrugged is selling so many more copies.


We should stop using political favors as a means of managing an
economic sector. Unfortunately, though, recent experience with health care reform
shows we are moving in the opposite direction and not heeding the basic
lessons of the financial crisis. Finance and health care are two
separate issues, of course, but in both cases we’re making the common
mistake of digging in durable political protections for special
interest groups.

came over the summer when it was reported that the Obama administration
had promised deals to doctors and to pharmaceutical companies under the
condition that they publicly support health care reform. That’s another
example of creating favored beneficiaries through politics.

If these initial deals are falling apart, it is only because reform
met with unexpected resistance. Even after Mr. Obama’s speech Wednesday
night, we’re still at the point where the medical sector is enshrined
as “too big to take a pay cut,” which is not so far removed from the
banking motto of “too big to fail.” In finance and health care, a
common political dynamic has created similar trends, namely,
out-of-control costs, weak accountability, and the use of immediate
revenue patches to postpone dealing with fundamental problems.

worse, these political deals threaten open discourse. The dealmaking
may be inhibiting some people in health care from speaking out in
opposition to the administration’s proposals. Robert Reich, who served
as secretary of labor in the Clinton administration, deserves credit
for complaining about this arrangement, but not enough people are asking where such dealmaking might stop.

The banking sector has been facing similar constraints; if bankers criticize the Treasury
or the Fed, they risk losing their gilded cages and could get a bad
deal when the next bailout comes. When major economic sectors can be
influenced in this way, are we really very far from the nightmare
depicted by Ayn Rand in “Atlas Shrugged”?

The conclusion is this:

In short, we should return both the financial and medical sectors and,
indeed, our entire economy to greater market discipline. We should move
away from the general attitude of “too big to take a pay cut,”
especially when the taxpayer is on the hook for the bill. If such
changes sound daunting, it is a sign of how deep we have dug ourselves
in. We haven’t yet learned from the banking crisis, and we’re still
moving in the wrong direction pretty much across the board.


It's amazing how you ideologues can fail to take the obvious lessons from reality. If there is anything our latest financial panic showed, it's that market discipline is overated. That's equally true, for somewhat different reasons, in medicine. The disconnect between the first part of your excerpt (sensible) and your conclusion (unrelated, but also daft) is striking.

You really ought to read, and ponder, Dan Ariely. There is more to reality and to economics than your markets and their magic. Adam Smith knew this - too bad you have forgotten.

Tyler, you still haven't explained how the Obama negotiations with physicians and insurance companies is ANY different from the standard horse-trading, let's make a deal, business as usual, seen in democracies since at least the Greek city-states and practiced in this country since the 1700s.

I think you told the truth, at an angle. It's a little like those 9-12 guys, waking up and carrying signs they could have carried all through the Bush years. These problems are deeply ingrained, structural, and largely non-partisan. The tragedy is that partisanship enters as each group offers and supports only a partial solution. A full solution is impossible because it would require ... Tyler to speak of the necessity of Federal oversight in finance in the same piece where he speaks of the dangers of Federal meddling in finance.

"If there is anything our latest financial panic showed, it's that market discipline is overated."

Perhaps, but could a separate lesson be the impracticality of counting on sensible regulation under our system of government. Haven't we had 70+ years of rule by the "brain trust" of independent civil servants informed by "social science"? You'd think they would have figured it out by now.

Tyler, since you publish your column in the NYT, let me say that today the NYT website has just a line on the death of Norman Borlaug. How many Ted Kennedys would it be needed to match Borlaug's contribution to humanity?

"If there is anything our latest financial panic showed, it's that market discipline is overated."

Nope, nope, a thousand times nope. Just as with Enron, it was the market that exposed the banks for their shoddy practices and disciplined them, NOT the regulators. It was six months into the failures and they were still hand-waiving about stress tests and other nonsense about 4 years too late. The market swung the big stick. Market discipline is only overrated if you don't like the outcome.

All the critics out there seem to think there are three choices: 1. current regulator suckage, 2. non-perfect market, or 3. utopia and they can't imagine why we don't see their vision.

I think you have it backwards in your analysis, and have turned the principles upside down.

First, it is the status quo that rewards doctors and hospitals based on the current reimbursement scheme. To depart from it requires that you tell persons what the alternative world will look like--or else, those who like the status quo will resist. So, as a starting point, we are not starting from a competitive equilibrium, but rather from a regulated one.

Second, assume that the current status quo rewards for non-performance. People get paid for procedures, and not outcomes. Now, you are a provider and you are offered a different equilibria: getting more patients BUT with a different payment schedule based on lesser reimbursement or a different model of reimbursement based on outcomes. The choice that is offered may increase consumer welfare without diminishing the welfare of the provider. But, you don't achieve that equilibria in a vacuum--providers don't hope that something will result later, they want to know how it will work before they move off the status quo.

Third, the only point you could validly make for the status quo is that it will ultimately fail, and at that point everyone will renegotiate their position. But, why should we get to the point of failure if we can avoid it now and increase consumer welfare?

@josh: How many banking crises did the U.S. experience between 1945-1975, the hayday of financial regulation?

(Not)Andrew ... the problem is a lack of proposals which work with people just the way they are.

Lot of things work "if everybody thought like I do."

It is scary when so many think nothing is wrong with politicians using the powers of the state to reward friends and punish enemies.

Giving ever more power to the state, often through ever expanding regulatory powers, will be the death of liberty.

How many of those who want to give vast powers to the state, even condoning restrictions on liberties in the pursuit of some equitable daydream, would also agree to the loss of civil liberties in pursuit in security.

If we give up free markets in pursuit of equity through political power, we will have neither equity, freedom, or the creation of wealth.

Some are blind to the dangerous path we are on others, amazingly, are screaming that the government, led by President Obama, must use the powers of the state to destroy perceived enemies and reward friends. And for some insane reason they think that is the path to prosperity.

Some are blind to the dangerous path we are on others, amazingly, are screaming that the government, led by President Bush, must use the powers of the state to destroy perceived enemies and reward friends. And for some insane reason they think that is the path to prosperity.

(Presidents and friends change ... well some of the friends, some apparently have staying power.)

No, the point is that you have to have a viable alternative even if you think a better reality awaits. YOu can't just go to the cabinet of magics and pick out the "no more bubbles potion" or the "elegantly regulated" magic wand.

The government who does have vast authority over banks (and healthcare, particularly the types of research funded, such as comparative effectiveness) has not proven itself a viable alternative.

Of course businesses make mistakes, noone is arguing that some businesses fail. The question is who can spot them before it happens, not the gov't.

The "go back to the regulation we had before all the deregulation" meme is nice but it doesn't work.

The move away from pull and arbitrary rule is one of the broad swaths of history. Rand had it right and Tyler does too.

Ah, so I see the word "Republican" appears not once, although there is a careful reference to LTCM, which of course happened on Clinton's watch. I guess being captured by Koch has its conventions too.

And I note with laughter that the same people up comments lamenting that the only solution is to minimize the size of government spent the eight years previous cheerleading the inexorable growth of the military. That's really funny, when you can detach about it. Because we all know, that War is the Health of the State.

Russell Carter,

I did no such thing, nor did a lot of small government advocates. Use your paint brush on the right targets.

Also, I didn't see the word "Democrat" in Cowen's column either. He correctly sees the problem as a bipartisan construction. Do you agree or disagree?

Great article by Cowen in the NYT.


You need to try to avoid self-deception generated by excessive partisanship--rah, rah for my team, boo for the others. Not everyone sees everything through such a distorted lens. You would be surprised at how liberating it is to open your mind.

There is some interesting commentary on this article over at the Volokh Conspiracy as well.

Many things MUST become "too big to fail." Politicization is an effect from this, not a primary cause of it.

The primary cause is that economic growth increasingly requires size, monopolistic competition and/or oligopoly. This is a basic lesson of modern growth theory. Economic growth requires increasing returns, and requires innovations in very complex technologies. These are frequently accomplished ONLY by oligopolies and by monopolistic competition. If you inhibit these, you are going to decelerate economic growth. In many cases, a very small number of firms is able to meet consumer demand MOST efficiently -- and also, ONLY these firms have enough market power to compete with overseas firms, if we intend to keep trade open.

This concentration makes "market discipline" problematic. Markets sometimes make adjustments in these only by bringing down the whole house of cards.

Finance: Without a financial bailout, the credit markets would have frozen up, bringing the economy to a screeching halt, no payrolls, no mortgages, people out on the street without a job.

Healthcare: Here, we require a monopsony. The cost is growing, due to demographics and innovation, but in fact the demand is not infinite, far from it: the demand is completely predictable, now and in the future.

We are arguing over how to pay for it. But individuals cannot pay for their own healthcare because the cost growth is outstripping the return on investment securities. So the idea of risk-sharing for the inevitable hospitalization of nearly everybody is a sham, it could never add up: and in reality the proposed mandate is a generational transfer, like Social Security. (Only with private insurers draining-off about 20% of the money.)

We should just nationalize it and give everybody what they need. You and I really don't care about making sure that we each have big screen TVs, but we feel it in our hearts when people don't get medical attention. That makes it a kind of public good. It won't hurt anything. The Defense Department hasn't stopped innovation in weapons.

Just to add one point to the discussion regarding labeling.

I do like like it when bloggers ascribe labels to other discussants. That goes for Nazi, Commie, Leftist, Rightest, Wingnut, etc.

When you talk to each other that way you are really trying to get an ally (who opposes that category name) to side with you without thinking.

Finally! Great column. Too big to fail is already evident in pharma, via Medicare. Commentary on the recent Pfizer settlement:

Just Like AIG

But Pfizer is the pharmaceutical equivalent of insurance giant American International Group Inc., which was too interwoven into the global economy to be allowed to fail. Likewise, if Pfizer were convicted of a crime, it would face debarment from federal programs. And that would mean that Medicaid and Medicare patients would have to either somehow pay pocket for vital medicines the company produces or go without.

“You have to balance the desire, an appropriate desire, to punish the company against the harm to patients,† says attorney Kelton.

via http://pipeline.corante.com/archives/2009/09/04/pharma_whistleblowing_how_it_works.php

"we’re still moving in the wrong direction pretty much across the board."

Why, yes. Yes we are.

And this is why we have Tea Party protests nationwide, with a recurring turnout that the nation has never before seen.

Sooner or later, even the New York Times will have to mention it. It's nice that you have noticed the underlying theme.

Another reason why politicization of markets is a bad thing is that people who are marginally involved in the political process get cut out of all the really good deals and thus get the shaft. We saw this in spades with CPSIA, the "toy safety" law that got out of control and required redundant expensive third-party lab testing that small businesses could not afford. Mattel got a provision written into it to allow them to do their own testing at their own labs, because they were politically involved with the process. The rest of us children's product makers woke up one morning to find we were getting screwed.

"If there is anything our latest financial panic showed, it's that market discipline is overated."

When government stands ready to bail you out, market discipline isn't being allowed to work.

If loss is not a real possibility, why would people behave as if it were? Bail them out and all they will do is take bigger risks.

The most annoying thing is that people see this as capitalism. It isn't. Whatever you call this collection of stupidity, it is not the way to run a economy.

In short, we should return both the financial and medical sectors and, indeed, our entire economy to greater market discipline.

Well, the argument before SCOTUS seems headed to corporate money being the same as private money, and money in all forms is individual free speech, making corporate interests as equal as individual interests, with influence in all cases magnified by their wealth.

Bottom line: corporations are equivalent to individuals.

Further, corporations are assets which can be owned and both and sliced and diced by the owners all according to market discipline.

Further, health insurance is describe by market advocates as the same as auto insurance. Thus individual health is equivalent to the mechanical status of cars, assets that can be traded in the market.

Further, when a car incurs costs as when broken down on the road and towed in, or being worked on in a repair shop, the car is an asset that secures the debt incurred from the services provided it. And when those debts aren't paid, then the asset is taken to repay to the extent possible the debt incurred, just as a corporation is taken by its debt holders to repay as much debt as possible. This is the market disciple.

So, health services incurred by an individual are secured by the individual as a asset just as the car secures the services rendered for it.

Market discipline calls for car===individual===corporation.

Thus, market discipline calls for the individual to be taken into possession by its creditors and reused or dismembered as the market dictates.

Creative destruction.

And it does solve the problem of organ scarcity: the sale of organs from the doctors and hospitals recovering their sunk costs from patients who are bankrupt and determined by market disciple to be unworthy of survival.

Now if creative destruction, as in euthanasia and sale of body parts isn't the logical result of applying market discipline to health care, please explain what is really meant by applying market disciple to health care.

Many comments here are really just weird and kind of scary - not to mention weak on economic insight.

Why does a market correction infantilizes a percentage of the population, as demonstrated by some of the posts here. Why do these puerile bloggers want to destroy markets and give the political class vast powers to punish those who stand in the way.

I remember reading Krushchev's autobiography. He explained his support for the Stalin purges as necessary actions because some people could not understand that they had to bend to the will of the government as they, Stalin and company, created a workers paradise. People were declared enemies of the state and sent to gulags while those who cooperated were rewarded. Krushchev regretted that the actions were needed but people could not be allowed to stop the progress that communists were bringing to the Soviet Union.

Even today some Russians say they miss Stalin because he gave some a sense of security.

America is changing. We are giving away our freedoms in exchange for false promises. Blindly desperate people will, I guess, sell the future of their children in return for a few magic beans today. And when we discover that we sold our freedoms for a mountain of debt, what will we tell these future generations. That we we were cowards. That we were scared little children.

The "go back to the regulation we had before all the deregulation" meme is nice but it doesn't work.

Why not?

Well did it work? At all before?

The government promoted the home ownership. They are still selling the bonds to the Chinese to increase debt. They can't even prosecute the genuine fraud that contributed to the sub-prime problem. When are they just going to do what their job already is? What are they going to do with more authority? I'm still waiting for specifics.

To be accurate, the meme works because people buy it in the absence of specifics.

Well did it work? At all before?

Thanks for replying. Name me one U.S. banking crisis during the hayday of financial sector regulation: the period 1945-1975.

@ Vehical Driver, who says: "No market proponent believes that players in the free market will be more disciplined or rational than anyone else. We believe some players will make good decisions, and survive, and some will make bad decisions, and fail..."

There is an important truth here: if failure of various kinds has no price at all, there is no incentive not to fail. Moreover, a system with no incentives for 'success' (however defined, and there's part of the rub) is likely to operate poorly.

But Driver's way of putting it also reveals the outright Social Darwinist and Spencerian implications of this position. "Fail" means starvation, and dying of treatable conditions, and a failure of human solidarity. From my experience, humans for all their flaws remain social being, dependent on one another (not least in infancy and senescence). Applying the logic of natural selection to human societies so straightforwardly means accepting the harshness of the state of nature. Driver may be comfortable with that, but I (with Hobbes and almost every other political philosopher) am not.

But Driver is right that every planning and regulatory regime will make mistakes, get things wrong, encourage inefficiencies, etc.

For the last several centuries, at least, the plausible solution to this seeming dilemma has been what we normally call "liberalism": the premise that a government should have limited authority. The liberal state, as I understand it, eschews the totalitarian agenda of complete control that failed so spectacularly in orthodox Communism, but still retains enough authority and resources to mitigate the "red-in-tooth-and-claw" features of a state of nature.

Naturally, the course of a liberal state will be uneven: sometimes events will push such a state towards central planning and a command economy (say, a major war such as WWII), at other times, the existence of multiple parties and a vibrant civic discourse will push back too far, leading to underregulation and too much callousness. US governments tend to lean in the second direction, European ones in the first, but both have made a pretty impressive go of 'seeking the mean' on control. What puzzles me, therefore, are the strident claims that minor adjustments to the precise course of the liberal state are the forerunners of totalitarianism -- as seen in the TeaBaggers and, in a much more thoughtful and nuanced way, in Driver's post.

In some respects, the state's control over various aspects of society have increased in the past decades, but in others they have manifestly decreased. State control over large parts of personal life are much weaker now, not stronger, and taxes on the wealthy are much lower now than they were from the 1950s through the 1990s.

So, in response to Driver's claim that liberals favor a "dream system, where the state plans all, either through outright government control, or strict enough regulations to eliminate any sort of diversity." That's just as much a preposterous straw man as some liberals' claims about the beliefs of market proponents, as Driver describes it.

If you have a large number of players allowed to behave in many diverse ways, a significant portion will stumble on the right solution and survive.

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