The Transitional Gains Trap and Obamacare

In my prior post on the Transitional Gains Trap, I discussed how a government program can provide special benefits or rents to a group initially, but then over time not provide any rents to anyone. Even though the program may be inefficient and undesirable, the existing beneficiaries may fight hard to keep it since they will be harmed by its elimination, even thought they are not receiving any rents from it.

If one favors government programs, then transitional gains are a way of making them popular. Social Security and Medicare transferred money from future generations to existing beneficiaries, which is part of the reason why they were popular.

Many people — both advocates and critics of Obamacare — believe that it will soon become popular in the way that Social Security and Medicare have. But if those programs became popular because of transitional gains, then Obamacare will only become popular if it has such gains as well.

But does it? I am not as familiar with the program as some, but it is not obvious to me what the significant transitional gains are. And if the transitional gains are absent or limited or not conferred on politically important groups, then Obamacare may remain unpopular.

I would be interested in a discussion of the transitional gains – especially redistributions from future generations – that might exist in Obamacare, if anyone knows of one.

Mike Rappaport

Professor Rappaport is Darling Foundation Professor of Law at the University of San Diego, where he also serves as the Director of the Center for the Study of Constitutional Originalism. Professor Rappaport is the author of numerous law review articles in journals such as the Yale Law Journal, the Virginia Law Review, the Georgetown Law Review, and the University of Pennsylvania Law Review. His book, Originalism and the Good Constitution, which is co-authored with John McGinnis, was published by the Harvard University Press in 2013.  Professor Rappaport is a graduate of the Yale Law School, where he received a JD and a DCL (Law and Political Theory).

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  1. R Richard Schweitzer says

    Professor Rappaport,

    As a follower of Gordon Tullock (from way behind) I offer the following:

    The PPACA (“Obamacare”) is, broadly speaking, a legislative redirection of private contractual relations.

    The initial stage of the “Transitional Gains” consists of legislative provisions requiring contracts (related to healthcare) to [1] transfer and allocate costs among potential “beneficiaries” with total disregard to the relationship between the costs incurred and the benefits allocated; and, [2] eliminate the relationship between prospective risks of needs in the determination of the “spreading of risks,” which is a function of insurance (including medical benefits insurance), and establish the relationship of “cost spreading.”

    Under “Community Rating” persons with higher prospects of need will incur lower proportionate costs than those with lower prospects of need (e.g., young males cf. postmenopausal females). Some “benefits,” such as female contraception may be transitional to those initial beneficiaries. However, the cost transfers from Community Rating may not be strictly “transitional” in Gordon Tullock’s classification.

    There are provisions that affect service providers. Some of those may provide “gains” that will prove to be in. This has been recognized by some operators of hospitals, in particular.

    The provisions with respect to Medicaid contributions to state programs have been examined, and their gains have been determined by the majority of states to be purely transitional.

    It would take a book by Betsy Macaughey (the best informed on details) to identify all the “benefits” which might be classed as transitional gains. Rest assured there are many.

    Of course, the subsidies from tax revenues transferred to the payment for individual costs of healthcare contracts are subject to transitional characterization for some recipients as they move out of the classifications of those entitled. We can expect the usual “political pressures” to modify and extend the conditions for subsidies as larger groups of recipients lose those benefits. However that is something different from the Gordon Tullock example.

    We will have to experience this legislation in order to understand what it does.

  2. gabe says

    Mike:
    Interesting pieces!
    I think, however, that there is a flaw in one of the basic assertions regarding transitional gains argument, i,e,; that there are no “rents” to be had once implementation has progressed beyond a certain point. Consider your example of the taxi industry. While the initial recipients of the taxi medallions may, in fact, reap greater benefits than the poor fellow who has had to pay upwards of $700K (see NYC) for his medallion, he, nevertheless enjoys substantial benefits from possession of that medallion. Competition is limited, an artificially high rate vs market rate is enabled (indeed, fostered by the municipality) and among other benefits the medallion is authorized to operate in areas not open to non-medallion fleets and the medallions fleets are not subject to seizure and fine by the authorizing authorities. Thus, the rents, while reduced, continue to provide real benefit. Never mind the avoidance of bankruptcy that would ensue were the medallion system to be dissolved as the “medallion” is usually heavily mortgaged (unless, of course things have changed radically from my student taxi driving days).
    Regarding transitional gains for Obamacare: At first glance , it may appear that these gains are lacking for a substantial segment of the population. After all, you must “buy” insurance from a state exchange or, alternatively, pay a “tax” (Thank you, John (bloody) Roberts). It typically works out that the initial tax is so small, and the IRS does not have any significant enforcement power, that it is advantageous to almost all to simply not sign up; if caught, pay the tax, if not go on your merry way. Most significantly, however, with the pre-existing clause, one would be foolish to pay anything until one is afflicted with some sort of serious ailment. At that point, we let the “guvmint” via hostage insurance companies provide the services.
    What is more, the subsidies that will be provided to “low-income” folks will make it almost painless for that sector to participate.

    And yet, there is something more:
    You comment: “And if the transitional gains are absent or limited or not conferred on politically important groups, then Obamacare may remain unpopular.”
    I would submit that there are such groups. An ever growing “mandarin” class of public servants charged with managing this system, the “hostage” insurance companies whose reluctant compliance was purchased by the Obama administration, and the various other businesses that will profit from implementation, medical records processing, systems development, etc. Bear in mind, that many of these can correctly be classified as “cronies” of the Democrat party and may be expected to provide support to said party. Also bear in mind that the exchanges will be operable in several states, and each state exchange will have its own rent seekers. Moreover, only approved insurance companies (can you say, monopoly) can participate.
    So, yes, there are transitional gains and they may be significant.

    And as in the case of medallions, they will not disappear after an initial implementation period.

    This of course leaves aside the great harm that will be done to a substantial portion of the country – and the infringement of personal liberty – but that is for another time.

    take care
    gabe

  3. says

    The redistributions in Obamacare will be from people who who consume relatively little healthcare, to those who consume disproportionately more. This is the rationale of the individual mandate; get healthy people who will not use much in the way of healthcare services to pay premiums to fund benefits for those who access significant benefits. Here is the nuclear bomb lurking in this arrangement: there is no certain definition of what “healthcare” is.

  4. John Ashman says

    The problem with the ACA is that it doesn’t address what actually causes skyrocketing costs, rather, it attempts to seek ways of shaving per capita costs, increasing incomes, expanding coverage. It can’t really do all of these things at once, or at best, can only do so temporarily. So what will be seen is a temporary slowdown in the rate of per capita costs, followed by a return to trational cost increases, especially as those who are forced to pay in now demand increasing amounts of services. Of course, this entirely ignores that stupendous level of unconstitutionality involved in the matter.

    The only way to actually reduce and contain health care costs is through cash payment of services by those who are receiving those services. I touch on many of these areas in this article – http://www.policymic.com/articles/13057/universal-savings-accounts-the-path-to-freedom-in-health-wealth-and-retirement – which also poses a solution to the problem that would actually reduce health care costs per capita by as much as 75% over 5 years as the marketplace responds to a low bureaucracy, highly competitive cash environment. It’s also arguably constitutional, even though it is right on the line, given that it still allows for some tax subsidy of family members.

    But in the end, the reality is that those who currently have insurance, will see little to no benefit at first, followed by no benefits in the future while those who are forced into insurance will end up subsidizing others, but not in a terribly meaningful way to the subsidizee, and at a painful cost to the subsidizer. The question is more of whether people will simply become numb to the ineffectiveness of government programs, as they usually do, and cling to the notion that “well, it could be worse”.

  5. John Ashman says

    The way out of the TGT is to provide a solution that costs little to no more than the existing solution, and uses savings and economic efficiencies to pay the double cost rather than have it paid transparently by a portion of society. The TGT fix is the only really debatable issue with my Universl Savings Account proposal, but what occurs is that health care savings combined with increased economic activity, and the ability to become self insured for most areas of ones’ lives more more than makes up for the situation, and the costs of the TGT fix are paid over a 20-30 year period as people slowly transition to the USA system from the Social Security system, and in this case, ObamaCare™.

  6. R Richard Schweitzer says

    With no intent to cavil with any of the preceding comments, the term “Transitional” as applied to a gain is basically limited to an initial period or an initial group.

    Once the gain has been established for initial period, a “transition” occurs to the nature of the game in that parties entering into the process (that generates the benefits) in subsequent periods incurs costs or detriments in order to attain what party is in the prior period achieved as a simple gain.

    The same occurs when new members seek to become part of a group that has attained an initial gain. There is a charge, or set of charges, for “admission” to membership in the benefited group.

    Thus the gain, if transitional, is no longer a “pure” gain, but they trade off; usually one that carries with it the risks that benefits may not outweigh the costs.

    The defects in the PPACA are indisputable. The gains are questionable and limited as to both parties and periods of time. However, identifying those particular gains, limited as they may be, as “transitional” is a different and difficult task.

    • John Ashman says

      The Transitional Gain gets you in, but it’s the Transitional Loss that keeps you trapped in the cycle.

  7. gabe says

    Richard:

    While I will agree with your definition of TGT, and of the nature of the initial gains derived therefrom, there is still to be confronted the issue of “what keeps it going” long after the initial gains have disappeared.
    Your description of the process in paragraphs 2, 3, & 4 above very aptly describes the situation in the “medallion” taxi industry. An initial licensing fee (medallion) was approximately $40K ( a not insubstantial sum in those days); current fees may range above $700K. Thus barriers to entry have been significantly enlarged and so the latecomers are faced with a substantial burden, as are the passengers employing this means of transportation. Yet it persists.
    Seems odd, does it not?
    However, we need only look at some other examples of TGT and Government mandated or induced programs and we may be able to see that there are in fact considerable gains to be had – the gains however have shifted to someone else.
    Consider farm subsidies, originally intended to help the “small farmer.” Arguably, this initially helped the small farmer (at great cost to the consumer). The average income of current recipients of farm subsidies is well above the median and mean national income, with numerous large agribusiness concerns reaping great benefit from the program. In fact, a number of years ago, it was disclosed that the Queen of England was a recipient of such governmental largesse. Additionally, an entire Department of government has grown up to “manage” this transfer of wealth from one sector to another. And while the increased costs to the consumer cannot be considered a gain, there are still gains to be had by a large segment of influential entities (business & federal agencies).
    If the majority of people are injured by such a policy, why does it continue? what sustains it? I would argue that it is because these influential entities “know where there bread is buttered” (sticking with farming, as it were) and exert their influence to keep the program alive.
    We can also look at ethanol, EPA, climate policies and we will discover the same nexus between those whose livelihoods are dependent on the continuance of such programs and the overseers of such programs. doing so, one can only conclude that “gains” persist, although they may no longer be called transitional.
    In fact, in some ways, it may be more appropriate to employ the term transitional, not in reference to temporary gain, but rather to the transitioning of an industry into a government dependency / appendage.

    take care
    gabe

    • R Richard Schweitzer says

      From Professor Rappaport’s first post on TGT (and per Tullock):

      ” But over time, even that special interest group will not benefit from the government program. Yet that group will fight hard to prevent the program from being eliminated, since eliminating it will make that group worse off.”

      If I have cotton allotments for which my daddy paid good money to Claude Voyles years back, and which give me an entre into that market (with its subsidies) that others don’t have, I don’t want allotments discontinued.

      • gabe says

        Depends upon the meaning and nature of “gain.” The barriers to entry imposed upon others, does in fact result in real gain to the entitled ones – not just a continued gain, nor loss of capital invested – and may come in the form of greater control of markets, pricing etc. Additionally, as neither markets nor government programs are static, the influence that the entitled have is significantly greater than would otherwise be the case and often results in additional benefits being eventually provided to the entitled group – special tax write-offs, accelerated depreciation, credits / loans for seed, etc etc, etc. If this were not so, why have huge lobbying organizations on their behalf?
        Are these not gains?

        take care
        gabe

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